Questor: Aggreko appears cheap, but the ‘greening’ it needs still looks far off. Avoid

The term “energy transition” has so far created about as much shareholder value as “profit warning” for the FTSE 100’s two energy giants, which are desperate to show they can clean up their act.

BP and Shell’s efforts to map out a path towards a net-zero carbon future have been greeted with scepticism in some quarters and fear in others, especially among those who have relied on them for years for generous dividends, now sharply reduced because of shrunken oil demand. Since Questor recommended selling BP in June, the shares have fallen by a third.

So it must be with some unease that long-suffering shareholders in Aggreko approach Nov 17, the date when the temporary power supply firm promises not only a strategic update but details of “how the business will evolve and deliver through the energy transition”.

Aggreko has certainly been forced to evolve but it has barely delivered under its chief executive of the past five years, Chris Weston.

Last year it said it would increase the dividend for the first time since 2014, which suggests some kind of corner-turning, although the final payment fell victim to coronavirus in the end. But a glance at the share price chart shows an eight-year downward spiral, exacerbated by the Covid-19 outbreak, which drove underlying operating profits down by 15pc at the half-year.

That’s one heck of a hangover since Aggreko’s chunky generators powered 39 venues used during London’s glorious 2012 Olympics. Questor has steered clear since 2017.

The company has been trying to retool to cope with higher costs and lower growth. Its reliance on the depressed oil and gas sector for a fifth of turnover hasn’t helped. It can’t simply sell up in this area, as Glasgow neighbour Weir Group did last week.

Aggreko’s rental solutions division – which supplies short-term, complex projects such as bridging the power shortages in Belgium last year – offers the highest margin.

The most challenged part has been longer-term projects for utilities in areas where the national grid is insufficient. Once this international work was a cash cow but competition has increased and margins have slipped. Some £57m of bad debt related to Africa, Venezuela, Yemen and Brazil was recently written off.

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Aggreko is a capital-intensive business that needs to drive the utilisation rate of its generator fleet higher than last year’s 65pc. It generates revenues from equipment rental charges, usage, design, maintenance service and fuel.

What’s positive is that Mr Weston has pledged to achieve profits of £80m-£100m this year and says he can continue to drive up returns on capital. Analysts at RBC, the bank, highlight Aggreko as one of only three stocks to yield more than 3pc in the support services sector; they also like its solid balance sheet, whose net debt is only 1.2 times earnings.

The future, it seems, revolves around decentralisation and decarbonisation. Part of the opportunity is to provide backup to solar and wind power generation, which can be weather dependent.

The other is in the increased use of microgrids, which operate independently of a national power grid in remote regions and often require energy storage and servicing. Last week Aggreko installed one of the world’s largest microgrids at the Granny Smith gold mine in Western Australia – a solar system that will work alongside the existing gas fired power station there.

And last year it debuted its Y. Cube product, a 1MW battery storage unit housed in a standard 20ft container, which makes it easy to transport. With a 10GW fleet that is 77pc diesel, Aggreko could do with some greening but it won’t be a quick process.

At least updating its generators, which have a lifespan of 15 years, is funded out of general operating expenditure. Company followers at Jefferies, the broker, estimate that it will take five years or more for Y. Cubes to reach 5pc penetration as clients require more renewables and therefore storage.

Aggreko has the same challenge as BP and Shell – to marry rewards for the planet with rewards for shareholders – and the same doubts exist even though the shares trade cheaply at 10 times 2021 forecast earnings. True, a brighter, greener future could beckon.

Aggreko is one to watch but better to await some more upbeat news before investing here. Hold off for now.

Questor says: avoid

Ticker: AGK

Share price at close: 440p

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