The stock of Scotland-based temporary-power provider Aggreko plc (LON:AGK) (OTCMKTS:ARGKF) is one boat that the market’s rising tide over the past year has completely missed. FPA Funds’ Pierre Py considers that oversight worthy of note.
For concrete evidence of the market’s “what have you done for me lately” nature, look no further than Aggreko plc (LON:AGK) (OTCMKTS:ARGKF). A global supplier of temporary-power solutions, over the past ten years it has increased operating margins from 13% to 23%, operating returns on capital employed from 11% to 20% and annual free cash flow from £20 million to £200 million. The shares, less than £2 ten years ago, hit £24 in late 2012 but have been low-wattage since, now trading at £16.30.
Aggreko plc (LON:AGK) (OTCMKTS:ARGKF)’s business model is elegant in its simplicity. It owns a fleet of 18,000 modular, diesel-powered electricity-generating units that it deploys worldwide to serve a number of customer uses, from meeting short-term or emergency power needs to providing back-up or supplemental power to utilities. Its generators, for example, will provide temporary power needs for the 2014 FIFA World Cup in Brazil. They supplement the variable generating capacity of hydroelectric plants in France. They provide incremental power to the capacity- and capital-constrained electricity grid in Bangladesh. The units’ modularity makes them relatively easy to set up, transport and take down, facilitating optimal utilization. The company also has an unmatched service network, with more than 190 depots in 47 countries.
Why the weakness in the stock? Recent earnings have disappointed, attributable to continued economic malaise in Europe, lapsed military contracts, the roll-off of Japanese deals signed after the 2011 earthquake, and a slowdown in global mining activity. Worries over emerging-market growth and bold growth plans articulated by #2 global competitor Apr Energy PLC (LON:APR) (OTCMKTS:APRYF) also likely haven’t helped.
None of which shakes the confidence FPA International Value Fund’s Pierre Py has in Aggreko plc (LON:AGK) (OTCMKTS:ARGKF)’s future. Despite the vagaries of quarterly earnings and market sentiment, he considers the company’s fundamental strengths fully intact. Global electricity demand has consistently grown at a 4% annual rate. The electricity grid is aging and overloaded in developed markets. Demand for power in emerging markets will continue to grow faster than permanent supply can be brought on line.Alternative energy sources that are taking share, including wind and solar, require more back-up power to smooth variable production. As for Apr Energy PLC (LON:APR) (OTCMKTS:APRYF)’s competitive challenge, he expects it to fall short, victim of its more-expensive gas-turbine technology, less-flexible asset base and inferior service network.
The beauty of Aggreko plc (LON:AGK) (OTCMKTS:ARGKF)’s model, says Py, is its flexibility. When opportunities are plentiful, it can increase capital spending, producing less free cash flow but higher operating profit and good returns on capital. When opportunities are scant, it can pull back on capex, increase cash flow, and return capital to shareholders.
H/T Dataroma
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