AGK (Agrekko) is a business support services Footsie company. It
provides power and temperature control solutions to customers who need
them either very quickly, or for a short or indeterminate length of
Operating margins are a monster 24%, so they really do seem to
have their customers by the short and curlies. Over
the last decade, the shares have returned 1098% (no, I haven’t
misplaced a decimal point). None too shabby! Share price performance
has been lacklustre YTD, though, with the shares down 8.5%, against the
Footsie of +5.1%.
Shares took a dive on 17 Dec 2012, when it issued a pre-close trading
update (http://is.gd/u25fS4). With the benefit of hindsight, investors
should have taken their cue from the share price reaction to seek out
better opportunities. Even if your timing was truly terrible, and you
sold out at the worst possible moment during the reaction, you would
still be ahead on where the share price is now. I’ve only just skimmed
the trading update, but they said that revenues were expected to be up
13%, and profits before tax and amortisation (I’ll get to that later) is
expected to be up 12%. Looks good, right? The flies in the ointment
were that they expected net debt to be around £620m, and increase of
£250m over the prior year. In their outlook statement, they state that
after a strategy review, they confirm they are leaders in attractive
markets which will deliver long-term growth. “However, after a year of
strong growth in 2012, the economic environment we will be facing in
2013 is particularly uncertain in many of our markets and it is
difficult at this stage to provide a definitive view of the likely
pattern of trading in 2013.” “We are taking a number of steps to
respond both to these one-off items and to a temporary weakening in
demand in some of our markets.” The market was savage in response to
the trading update, but I didn’t think it looked bad. It shows you how
much I know then! It can be very difficult to know how to interpret
setbacks, but it appears that “temporary weakening” is a phrase that
comes back to haunt us.
Skip forward to 18 Jun 2013, when AGK issued a trading update
(http://is.gd/i0Gcfk). It reported “First half trading in line with our
expectations; full year guidance unchanged.” Group revenues in H1 will
grow around 5%, and trading profits will be at similar levels to the
prior years. “We expect the Local business to deliver a strong first
half while trading in Power Projects remains subdued, albeit that the
prospect pipeline has improved since the start of the year. In the
second half, revenues in Power Projects are expected to be higher than
in the first as our new gas contracts in Mozambique and Côte d’Ivoire
come on line, and we expect that the Local business will continue to
deliver growth. Overall, our expectations for the full year remain
unchanged.” The market didn’t react much to the news, and sent the
share prices down slightly. The share price had been building up
throughout June, though, so it looks as though the market was
distinctly indifferent to the report.
I think there’s a few observations to make here. The margins are
excellent, and they seem to be in a relative position of power (no pun
intended) against the customer. They are supplying capital goods,
however, so we shouldn’t be too surprised that they can earn higher
margins compared to a pure service company.
At a PE of 17, I would have expected a much better growth story.
Perhaps it is the fact that the company is “well seasoned” that
investors felt comfortable in paying a premium to the market. On the
other hand, it has an EV/EBITDA of 8.06, which probably around about the
market average. So, not too high.
Now we come onto a couple of more worrying points. AGK has a relative
six month strength of -8% – suggesting that investors should have
gotten a bit sniffy as to whether they should have bought ahead of the
recent trading statement. The bad reaction to the one in December
should have forewarned investors that selecting AGK as a suitable buy
would be a tricky one.
Now onto the much more tangible worries. Stockopedia shows that AGK
“qualifies” for the James Montier “Cooking the Books” short selling
screen. Oh dear, that can’t be good! My anecdotal observation of the
short-selling screens is that they are quite good at picking out dross.
Over a 1-year period, Stockopedia’s “Cooking the Books” screen
underperformed the market by 26%; exactly the sort
of thing that one would hope for in a short screen. So, if you see a
company land on one of the short screens, it might be time for you to
double-check your reasoning before making a purchase.
Adding on to that, I noted that one of their favoured metrics is
“profit before tax and amortisation”. Hmmmm. Since the company
leases equipment, surely amortisation of capital equipment is a vital
component in what determines profit and loss. N’est pas? You can’t just
ignore it. I also note that AGK has a Piotroski score of 3 – “not
ideal”, shall we say.
I am, perhaps, over-emphasising the negatives. The company has a good
story, and a fantastic record. The way it reported results seem rather
on the rigged side, though, and it seems that investors are glossing
over them and just looking at the historical record.
Citywire reports (http://is.gd/ADkm2a) “UBS downgrades Aggreko on flat
profits outlook”. “it’s heavily geared into growth in commodity-driven
economies. ‘Thus less commodity intensive growth presents a cyclical
headwind to the long-term structural trend,'”
Not one for me, but interesting to comment on nevertheless.