The last six months have seen shares of temporary power specialist Aggreko (LSE: AGK) fall by 24%. Concerns over falling profit margins, bad debts and a weak outlook for the oil and shipping sectors have been to blame.
Today’s trading statement from Aggreko has knocked another 3% off the group’s market cap. In today’s article I’ll ask if this is the bottom for the firm, or is there still more bad news to come?
I’ll also explain why the potential for an oil market recovery and a $52.7m cash payment could make oil producer Soco International (LSE: SIA) a compelling buy.
Powerful problems
Aggreko’s underlying revenue fell by 7% during the third quarter, according to today’s statement. However, the group expects to hit full-year guidance for an underlying pre-tax profit of £225m. This is almost unchanged from £226m last year and suggests that, after a period of decline, profits may now be stabilising.
The group’s business has two main divisions. The rental division serves industrial customers in developed markets. The biggest problem here is weak demand from the US oil and gas sector. Aggreko says that revenue fell “materially” in North America during the third quarter.
The other half of Aggreko’s business involves providing temporary power to industrial and utility customers in emerging markets. Much of this business is on long-term contracts, but rates seem to be falling. Aggreko said today that it was hopeful of winning a 200MW contract renewal in Argentina “at a price level that represents a significant discount to the historic pricing”.
It’s not yet clear whether Aggreko’s profit margins will ever return to the peak levels seen a few years ago. But the company’s performance does seem to be stabilising. The shares currently trade on a forecast P/E of 12 and offer a prospective yield of 3.5%. With profits expected to rise next year, now could be a good time to consider getting involved.
This oil producer could pump cash
Today’s statement from Vietnam-focused oil producer Soco International contained the disappointing news that a $52.7m payment due to the firm from a Chinese company will be delayed for “at least 30 days”.
Soco says that the company, a subsidiary of the China National Petroleum Company (CNPC), does acknowledge the debt, but has requested technical information about the asset from CNPC. In the meantime, Soco remains well financed, with net cash of $83m and no debt.
Indeed, I believe Soco’s ability to generate cash could improve rapidly if the price of oil rises. The group’s breaks even on cash flow in the “low $20s” per barrel. This suggests to me that a relatively small increase in the price of oil would be enough to trigger a sharp increase in Soco’s free cash flow and operating profit.
Oil from Soco’s Vietnamese fields usually sells at a premium over Brent Crude of about $1 per barrel. If the oil price stabilises above $50 in 2017, I’d expect earnings guidance for Soco to be significantly upgraded. It’s also worth noting that the group’s dividend is expected to rise to about 6.1p per share in 2017, giving a forecast yield of 4.5%.
With Soco shares trading at a discount of about 15% to their tangible book value, I believe this stock remains a medium-term buy.
