Argentine woes set to impact Aggreko

The challenges in the Argentinian market relate to extensions to utility contracts which were originally signed in 2008 at a time when turbulent economic conditions enabled the group to negotiate a margin relative to the risk of operating in the country.

Glasgow-based Aggreko recently extended its fixed power contracts in the country until the end of 2017 at a “material reduction” on the original price. Its standby power contracts meanwhile are expected to end this month, with the group among the bidders for a replacement contract.

The tender process for this contract was thrown into upheaval in November when all bids were revealed, resulting in a“very competitive” replacement tender.

In the near term the repricing will impact both margins and returns, with Aggreko adding that much of its cost cutting measures have been offset by the impact of such legacy contracts.

“Looking beyond this, and applicable across the whole group, we would expect margins, and therefore returns, to benefit from topline growth,” said Aggreko, as it outlined further cost cutting.

Overall, a two per cent growth in its rental solutions business was unable to offset reductions in its power solutions business, which saw industrial sales fall two per cent and utility sales down eight per cent.

The contract renewals in Argentina, along with a loss of business in Mozambique, hit industrial utility sales, but this division posted an operating profit of £164m, up 24 per cent. Industrial power solutions saw operating profit fall 21 per cent to £32m.

The biggest impact on profitability was the low oil price in the US market, Aggreko’s biggest, where rental solutions operating profits halved to £52m.

Revenue in North American was down 18 per cent – leading to a £30m impairment charge, which took the bulk of the group’s £49m exceptional charges. Post-exceptional pre-tax profit was down a quarter to £172m.

Revenue was helped by a £122m translational currency benefit, which also added £1m to operating profit. Excluding the currency benefits, revenue fell by ten per cent.

Elsewhere, the group said: “In rental solutions, our North American business is showing signs of stabilisation after a difficult 2016. Most sectors are up on the prior year to date and the higher oil price is giving ground for cautious optimism. We expect our Europe and Australia Pacific businesses to continue to perform well throughout 2017.”

The group added that its power solutions business was expected to perform well in 2017, driven the Middle East and Eurasia.

The pipeline in power solutions utility was reported to be in healthy shape and well-spread geographically, although the company noted that thus far orders been lower than in the prior year.

Chris Weston, chief executive, said: “We expect to see growth across the group in 2017, augmented by incremental annualised cost savings of £25 million from the second half. However, this will be more than offset by the significant impact of Argentina and as a result we expect full year profit before tax and pre-exceptional items to be lower than last year.”

Mr Weston said he was pleased with the progress being made regarding the transformation programme to return the business to growth, which focuses on customer, technology and efficiency

“These improvements, taken with our market leadership, technical capability and the need for our products being as relevant as ever mean I am confident we are well on track to create a stronger business for the future,” he added.

Mike van Dulken, head of research at Accendo Markets, called Aggreko a “standout underperformer”, commenting: “While lower oil prices hurt it in 2016, especially North America, the challenging year was capped off with some nasty margin contraction. 2016 results may well have been in-line with consensus… but [the] real kick in the teeth is the unpalatable 2017 outlook.”