Troubled temporary power provider Aggreko (LSE: AGK) is falling today after the company issued a disastrous trading update and warned on profit.
Aggreko’s business has been hit by a number of factors over the past year, including weakening demand from the US shale industry and fighting in Yemen. What’s more, Aggreko is in the final stages of renewing contracts to provide 325 megawatts of gas plants in Bangladesh, but warned today that the terms for these contracts will now be worse than expected.
As a result of all these factors, Aggreko’s management expects pre-tax profit for the year to fall between £250m and £270m. This estimate excludes the effect of exchange rates, which have moved adversely in recent months. Analysts were expecting the company to report a pre-tax profit for the year of £293m.
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Latest warning
Today’s depressing trading update is the second such warning from Aggreko this year. Back in March, Aggreko told investors that pre-tax profits for 2014 fell 13% year-on-year because of a mining industry slowdown in Australia.
And it doesn’t look as if things are going to get any better for Aggreko any time soon.
Falling commodity prices are pressuring miners to slash capital spending at a record rate, and US shale producers are facing mounting pressure as the price of oil remains stubbornly low.
Indeed, alongside today’s trading statement Aggreko’s management actually hinted that there could be further pain to come for the company in the near future. The company warned that:
“…we have seen a further slowdown in North America with volumes in the shale basins continuing to decline. More recently, we have begun to see an impact on our offshore oil and gas business in the Gulf of Mexico.”
With this being the case, I wouldn’t rule out another profit warning later in the year.
High expectations
Aggreko’s fall grace over the past three years has caught many of the company’s supporters by surprise. Rising costs and operational issues have squeezed Aggreko’s profit margins since 2012 and, while revenue has remained steady, earnings per share have declined around 22%.
Unfortunately, Aggreko has always traded at a premium valuation, which didn’t leave much room for error. Specifically, during the past five years Aggreko has traded at an average forward P/E of around 20.
And as the company has failed to live up to expectations, its shares have plummeted. Since hitting a high of 2,500p per share during 2012, Aggreko’s shares have slumped by 50%.
There could be further declines to come if the situation in the US deteriorates. Even after today’s declines Aggreko still trades at a forward P/E of 14, based on old forecasts. When City analysts have revised their numbers lower based on today’s news, Aggreko’s shares will only become more expensive.
All in all, for the time being as there could be more bad news on the way, investors should be cautious around the temporary power provider.
