Argentina inflicts yet more woe on Aggreko
ARGENTINA continues to weigh on Aggreko as profit for 2017 tumbled by almost 12 per cent because of ongoing legacy contract issues in the South American country.
Shares were down 10% in early trading as the Glasgow-based group said the repricing and off-hire of utility contracts in Argentina was masking the overall performance of the business, which saw revenue climb 4% to £1.7 billion.
Aggreko, the world’s largest supplier of temporary power, has faced issues in Argentina relating to contracts which were signed in 2008 at a time when the country was more volatile, enabling Aggreko to negotiate a high margin given the additional risk.
After signing contract extensions to run through 2017 at a reduced rate, the company expects new contracts to be signed at a further discount, but said overall pre-tax profits for 2018 would be in line with last year.
Fiona Cincotta, senior market analyst at City Index, said the recovery in oil prices had failed to produce the bounce investors were hoping for, and she noted concern over the erosion of operating margins, which fell by three percentage points to 13%.
“Management is confident that product enhancements will bear fruit and there’s some cause for optimism in the underlying revenue figures,” she said. “But investor patience will be wearing very thin amid what has become a consistent stream of earnings shocks.”
Pre-tax profit fell 11.7% to £195m, following a 12.2% drop in 2016.
The Argentinian operation is part of Aggreko’s power solutions utility business, which supplies and operates mobile power plants in countries where grid connections are unavailable or unreliable.
Over this part of the business underlying revenue was flat when the impact of Argentina is taken out. Including Argentina, revenue fell by 9% to £531m and operating profit was down 25% to £148m.
Elsewhere, Aggreko also continues to see delays in customer payments, in particular on a handful of projects in Africa and as a result of the ongoing economic situation in Venezuela. This led the group in increase overdue debt provision through the year by $23 million to $86m.
The industrial side of the power solutions business saw revenue climb 20% to £340m. In Eurasia, revenue climbed 64% driven by continuing strength in the oil and gas sector. This sector also saw a £17m contribution from the South Korea Winter Olympics.
Rental solutions, which is the largest part of the group, saw revenue climb 9% to £720m as operating profits were up 49% to £81m before exceptional charges.
This performance was supported by incremental work following the hurricanes that impacted the southern United States and Caribbean.
Aggreko said that in its North American business the decline in the oil and gas sector throughout 2016 has stabilised and although revenue here was lower year-on-year, it delivered growth in the second half.
Chief executive officer, Chris Weston, said he was pleased with the revenue growth, noting that the challenges in power solutions utility “held back the group overall”.
“Over the last three years we have stabilised the business, enhanced our service offering and positioned ourselves to prosper in rapidly changing energy markets,” he said.
“We have delivered over £100m in cost savings, invested in new systems and processes and developed new technology, all of which enables us to provide high quality solutions for customers.”
Aggreko said with markets seeking to be greener with power provision, it had created a new global solutions business, which would focus on integrate its current fleet with the storage and renewables capabilities it has gained following the £45m acquisition of battery-storage specialist Younicos in July last year.
Dan Ibbetson was appointed to lead this business, and the company said it would invest £9m this year to capitalise on opportunities, up from £7m last year.
It will deliver contracts through the rental and power solutions businesses and will not result in any change in the structure of our external reporting.