Rally at hard-hit Aggreko divides the City

Brushing off fears that coronavirus had struck its huge Olympics contract, shares are flying today.

A cash-rich performance by Aggreko (LSE:AGK) in annual results today helped to ease concerns about coronavirus and its impact on the Tokyo Olympics that will be pivotal to 2020 trading.

The temporary power generation group signalled its confidence with a 3% rise in its final dividend to 18.27p a share, having delivered free cash flow 40% higher than some City forecasts.

The performance helped the former darling of the FTSE 100 index to rally 5% to 708.4p, recouping some of the ground lost in a 22% slide since the middle of January. It said it was closely monitoring the impact of the coronavirus outbreak, both in terms of the Tokyo Olympics and the group more widely, but that it saw no reason to revise expectations for 2020.

This means the Glasgow-based company has stuck by its mid-teens target for Return on Capital Employed in this year and beyond. The figure in 2019 improved to 11.2% from 10.3%, despite a 4% reduction in overall volumes on hire and lower levels of utilisation.

Source: TradingView Past performance is not a guide to future performance

The provision of Aggreko generation capacity for major events such as the Summer and Winter Olympic Games or the FIFA World Cup is a significant source of revenues for the company's industrials-based power solutions division. However, it emerged today that the Tokyo 2020 Games could be postponed until later in the year amid fears over coronavirus.

Analysts at Citi noted that the Tokyo contract had grown in value from US$200 million to $250 million, of which some is in 2019 figures. Their forecasts model for 30% contract margins. 

The Aggreko share price peaked at almost 2,500p in the aftermath of the London Olympics in 2012 before a steady decline in the following three years and unsteadiness since then.

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Analysts at UBS have a “sell” recommendation and price target of 700p, pointing out that today's slightly better-than-expected 13% rise in underlying operating profits to £241 million did little to change overall consensus forecasts in the face of the coronavirus risk.

Counterparts at Jefferies, however, are more positive after reiterating their 1,150p price target. They said: “Aggreko continues to deliver in line with their objectives on capex discipline and cash collection, driving inflecting returns which we believe should re-rate the shares.”

They were particularly impressed by the £628 million in cash generated during the year, compared with £423 million the year before after a big improvement in working capital cash flows. Net debt was £584 million at the end of 2019, £102 million lower than in 2018.

The industrial part of Aggreko's power solutions division grew underlying revenues by 2% last year, but this rose to 6% when the 2018 Winter Olympics and early project management work for the Tokyo Games are excluded. Profits were down 7% in the period. 

The rental solutions arm, which accounts for more than half of the group, saw underlying revenues decline 1% but profits still rose 22% after a big improvement in its operating margin to 15.9%. This reflected higher rates in key sectors within North America and emergency work in Belgium in response to power shortages.