Shares in temporary power specialist APR Energy (LSE: APR) fell by 13% in early trading this morning after the firm announced that, after waiting since July for the Libyan authorities to ratify its contract renewal, it would now abandon the project and withdraw its equipment from the country.
Unfortunately, Libya was a key customer for APR — Reuters has previously estimated that APR’s sales from Libya were worth around $200m per year, or 40% of 2014 forecast revenue.
APR now needs to demobilise and export a substantial amount of generating equipment from Libya. This will require the assistance of local contractors and government department. The costs and time involved could be substantial, and some of these assets may have to be abandoned.
APR said today that its Libyan assets will be deployed elsewhere, but investors need to ask where: at the half-year point, APR’s fleet utilisation was only 77%. If the Libyan assets also become available again, does the firm have enough new business to absorb this extra capacity?
Uncertainty over the future of APR’s Libyan assets is one of the main reasons APR shares currently trade at just 0.2 times the firm’s tangible book value of 806p per share. Clearly, investors don’t believe this value is realistic.
Similarly, after today’s falls, APR trades on a 2014 forecast P/E of 3.3. We won’t find out APR’s 2014 full-year earnings per share until March, but investors are clearly betting on earnings being much lower than even the latest forecasts.
Dividend and debt
APR’s prospective yield of 7.0% is based on the firm’s $0.17 per share dividend payout remaining unchanged this year.
I’d hazard a guess that this payout could be cut, given the probable impact of the loss of APR’s Libya contract, and the firm’s ongoing interest costs, which I estimate at around $20m for 2014. After all, APR’s operating profit was just $69m in 2013.
We still don’t know
Part of the problem is that APR has been reluctant to provide any precise numbers about its Libyan operations: we don’t know the full-extent of the impact on sales, profits or asset value.
We should know more in March, when APR is expected to report its full-year earnings. Until then, the firm’s shares remain a very risky recovery buy, in my view.
Investing in special situations like APR Energy can be very profitable: if the firm’s shares recovered to just two-thirds of their current tangible book value, investors at today’s 160p share price would see a 235% profit!