Credit Suisse ups rating on Aggreko to 'outperform'

Credit Suisse has upgraded its rating on Aggreko, encouraged by a focus on improving return on capital employed and a key contract to supply power to the 2020 Olympic and Paralympic Games in Japan.

In a note published on Tuesday, the bank, which increased its rating to 'outperform' from 'neutral', lifted earnings per share estimates for 2020 by around 7% "to better reflect the Olympics opportunity".

Under a $200m contract secured last year, the specialist in temporary power generation will supply power for 43 competition venues, the international broadcast centre and the athletes’ village.

Credit Suisse said a focus on return on capital employment "gives the potential for re-rating: management has a comprehensive cost-out programme and number of initiatives targeting improvement at all levels of ROCE calculation".

It continued: "We forecast return on capital employed to increase from a trough of 10.3% in the 2018 full year to 15.9% in the 2023 full-year, with some fluctuations due to the Japan Olympics, which adds around 170bp.

"With the EBITDA versus moving broadly in step, we believe this will lead to a re-rating from its current multiple, which is close to 10-year lows.

"We are cognizant to the structural challenges and Aggreko will need to evolves its offering toward the hybrid solutions, rotating out of its diesel kit (currently 78% of the power fleet). In the near term we believe the immediately and reliability that diesel provides will limit the downside risk as these alternative solutions evolve."

The target price for the FTSE 250 company was upped to 905p from 750p.

As at 1215 GMT, shares in Aggreko were ahead 1% at 812.65p.