Aggreko shares power down after weak demand warning

AGGREKO shares dropped 6 per cent yesterday after the company revealed it has cut its capital expenditure plans and warned of further weakening in demand.

The Glasgow-based group, which supplies temporary power generators to customers around the world, admitted demand had deteriorated in the second quarter in the US, Europe and the Middle East.

But the firm also revealed that thanks to the weakness of sterling against the dollar, this year's profits could still exceed last year's record level.

Chief executive Rupert Soames yesterday explained that Aggreko's business in developing economies such as Africa and South America continued to grow.

However, Soames conceded that the company, which has a manufacturing base in Dumbarton, was suffering in other part of the world and that its margins were under pressure.

Soames commented: "For a lot of markets it's pretty tough. We're managing to hold our own... which is better than a lot of businesses, but we are in a recession. Times are tough."

First-half revenue, excluding currency movements, is expected to be 10 per cent lower in the US compared to the start of 2008, and 11 per cent lower in Europe and the Middle East.

Soames said the amount of generators out on rent in those economies was stable but there had been a fall in rentals of temperature-control equipment.

Typically, spending on air conditioning devices is more discretionary than that for power supply equipment, Aggreko believes.

"I think there is an economic thing; people are trying to save on expenditure where they can," Soames said.

Spending continues to be strong at Aggreko's International Power Projects (IPP) business, which supplies large-scale power generation projects in developing economies.

Aggreko said that the IPP business was expected to report revenue 40 per cent ahead of last year, and would continue to grow, although at a lower rate, in the second half. Even in the developing world there are signs of conditions becoming more difficult.

Soames commented: "In terms of prospects in the pipeline and inquiries, we've got a big list. There's more prospects than we've ever had, we've quoted for more projects than we've ever quoted before.

"But the conversion rate is much lower. It's quite difficult to get people to put their pens on the dotted line."

The softening in demand prompted the company to cut its capital expenditure plans for 2009 from £195 million to £170m, a fall of 13 per cent, although Soames the board still planned to spend £1 billion on capital expenditure before 2012.

Soames explained: "We think that its prudent to spend a little less in the second half than we had planned and see how things turn out.

"If things get better and we are knocked over by customers wishing to place large and valuable orders with us, then we can increase it quite rapidly."

Aggreko has warned that it will struggle to match the second half of 2008, a period when it was boosted by supplying power to the Beijing Olympics, the US Presidential debates and inauguration, and a busy North American hurricane season.

Despite this it expects profits at constant currency would be level with 2008, and that a fall in capital expenditure would make it "strongly cash generative" this year. Shares closed 32.5p lower at 492p.