LONDON (Alliance News) - Temporary power company Aggreko PLC on Thursday warned on the short-term outlook for its profit margin and return on capital as it undertakes a restructuring programme following a sharp fall in pretax profit in the first half.
Aggreko said its pretax profit in the six months to the end of June was down to GBP102.0 million, 21% lower than the GBP130.0 million it posted a year earlier, following a decline in its trading margin in the first half. In July, Aggreko saw its shares plunge after it issued a profit warning for 2015, saying its business was taking a heavy hit from the protracted slowdown in the US oil and gas market and from "ongoing security challenges" in Yemen, which is in the grips of a civil war.
On Thursday, Aggreko confirmed its profit guidance for the full year of GBP250 million to GBP270 million. The company posted a pretax profit of GBP289 million for 2014, down from GBP333 million in 2013, and the guidance for 2015 was below the GBP292.4 million analysts had been forecasting prior to the profit warning. According to Morningstar, consensus estimates for 2015 are now at GBP257.0 million.
Total revenue for Aggreko was marginally higher in the half, up to GBP781 million from GBP768 million, boosted by a rise in local business revenue, including from the delivery of the European Games. But power projects revenue was down by 9% in the half, hit by pricing pressures in Bangladesh and by a lower utilisation on its contract in Panama.
Aggreko said it will pay a flat interim dividend of 9.38 pence per share.
As a result of the challenges the group faces, Chief Executive Chris Weston has outlined a series of measures it will take in order to mitigate the challenges it faces, including targeting cost savings of GBP80 million in 2017, which will result in it booking exceptional costs totalling GBP30 million. As a result of the restructuring programme, Aggreko said 2016 will be a "year of change", with market conditions set to remain difficult and its returns and margins to take a short-term hit.
Under the restructuring, the company will also realign into two divisions; Aggreko Rental Solutions and Aggreko Power Solutions. Aggreko Rental Solutions will incorporate its local businesses in developed markets, while Aggreko Power Solutions will include is power projects business and its local businesses in developing markets.
Weston said the medium-term focus for the company will be on three areas: Customer, Technology and Efficiency. The Customer portion will focus on developing its account management approach and increasing the company's capabilities in delivering complex projects. The Technology part will aim to reduce the overall cost of power for its customers, and the Efficiency portion will see the group looks to improve its processes and systems.
Investec analyst Andrew Gibb said the broker does not disagree with Weston's view that Aggreko remains a strong business in a market which still offers attractive growth prospects. But there are many clear near-term trading challenges the group faces and risks attached to the new strategy, Gibb added, as the broker retained a cautious stance on the stock.
"The performance of the group in the first half was impacted by difficult trading conditions in a number of our markets, notably Bangladesh, and external factors, including the impact of a lower oil price and ongoing security concerns in Yemen," said Aggreko's Weston.
"The performance of the group in the first half was impacted by difficult trading conditions in a number of our markets, notably Bangladesh, and external factors, including the impact of a lower oil price and ongoing security concerns in Yemen," Weston added. "I am impressed by the commitment of our people and our culture, and I am confident that our new focus and structure will see the business return to growth."
Aggreko shares were down 1.2% to 1,173.00 pence on Thursday.
Aggreko said its local business revenue was up by 3% in the half, driven by a strong performance in Europe, Middle East and Africa on the back of the GBP13 million in revenue it booked from the European Games held in Azerbaijan in June.
This was offset, however, by a decline in revenue its Americas business from the slowdown in the oil and gas industry, where spending by operators is being cut in order to keep projects economically viable in a low oil price environment, and by tough comparators in Brazil, which was boosted a year earlier by the World Cup. Asia Pacific local business revenue was flat year-on-year.
In Aggreko's Power Projects division, revenue fell on the back of soft utilisation at its Panama project, due to higher hydro levels, while volumes declined in Indonesia and the group saw lower pricing from its contract in Bangladesh. Power projects trading in Europe, the Middle East and Africa was solid, boosted by its good order intake in Africa in 2014.
Aggreko's trading margin in the half was down to 15% from 18%. Pricing and volume pressure was felt in its oil and gas-related businesses in North America, and the group was hit by the pricing pressure it faces in Bangladesh.
In July, in the profit warning it issued, the company said that trading terms for gas contract extensions in Bangladesh are likely to be less favourable than its earlier expectations and, while it is taking actions to mitigate the problems, as it is on its oil and gas business in North America, this will still take a bite out of its full-year profit.
By Sam Unsted; samunsted@alliancenews.com; @SamUAtAlliance
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