HSBC says Aggreko woes are cyclical as it upgrades to 'buy'

Most of Aggreko’s problems are cyclical rather than strategic, HSBC said as it upgraded the generator hire company to ‘buy’.

Many investors think Aggreko’s troubles are caused by structural issues such as changing technology, new competition and overcapacity. But a resources sector slowdown has aggravated a decline in demand for temporary power since 2014, HSBC said.

“We think that much of Aggreko’s woes are of a cyclical nature, rather than structural,” the analysts said. “The supply chain is supportive of expecting such a recovery, bar the risks from a trade war led disruption.”

The under-use of Aggreko’s assets is also an opportunity because its equipment often lasts longer than the accounts assume, HSBC said.

“Under such a backdrop, the cost savings plan and improving resources sector demand make the revised strategic target of mid-teen ROIC (earlier 20% target, set in 2015) feasible,” the analysts said.

Upgrading to ‘buy’ from ‘hold’ and raising their target price to £10.50 from 740p the HSBC analysts said: “If Aggreko moves from its current unloved status to the ‘new management turnaround of a fallen angel’ story, we expect the upside to be attractive.”

Key risks to HSBC’s assumptions are trade wars that could hamper growth and receivables collection and contract churn driven by underinvestment.

Aggreko shares stood at 829p when HSBC made its upgrade. At 12:42 BST the shares were up 4.5% at 879.80p.