Smart Investor: my verdict on Aggreko

FTSE 100-listed Aggreko (AGGK.L) provides power generation and temperature control systems across the world. It has provided such equipment at events as large as the Olympic Games, the football world cup and the US Superbowl. It also has substantial contracts in locations where energy infrastructure is less reliable than in the UK, such as parts of Africa and Asia.

In spite of it not being a household name, Aggreko is a sizeable entity and employs 3,800 people across 34 countries. It was established in the Netherlands in 1962, with the 1980s being a time of rapid growth for the company as a result of various acquisitions, notably in the USA and Singapore.

Today, it continues to seek bolt-on acquisitions – the most recent of note being that of N.Z. Generator Hire Limited in 2011 – and, with a market capitalisation of £6.06 billion, it is the 51^st-biggest UK-listed company.

Performance review

The past five years have been a period of rapid growth in net profit for Aggreko, with the bottom line increasing from £80 million in 2007 to £231 million in 2011. This is an annualised growth rate of 23.7%, which is hugely impressive – especially when the state of the global economy is considered. Return on equity (ROE) of 26.3% last year and an average of 26.9% over the past five years is also very attractive.

Furthermore, despite the above mention of acquisitions, Aggreko’s financial gearing levels are very comfortable. The debt to equity ratio stands at a moderate 47.4%, with interest cover offering substantial headroom at 17.4. Such figures reinforce the impressive profitability of the company, with the ROE being achieved without a boost from high debt levels.

However, a dividend yield of just 0.9% from a paltry payout ratio of 24% last year is disappointing. Income seekers will clearly not be drawn to Aggreko, although management will undoubtedly argue that an annualised growth rate in dividends per share of 21% over the past five years is more than most companies have delivered.

Buy, sell or hold?

As for whether shares offer reasonable value at their current price of £22.60, a price to earnings ratio of 26 and a price to book ratio of 6.85 confirm that they are grossly overvalued.

Sure, Aggreko’s profitability and ROE are mightily impressive and show that the company has experienced substantial growth in recent years and appears to have a generous economic moat. Furthermore, it is financially sound and geographically diverse. However, at current levels buyers are simply being fleeced.

Of course, as value investors such as myself are well aware, taking this approach means missing a golden opportunity once in a while. Every so often an overpriced company becomes much more overpriced. But, crucially, this does not mean it should be bought. The chances are that Aggreko is not a golden opportunity, although for those of you who hold it I sincerely hope it is.