20 October 2016 Europe/United Kingdom Equity Research Diversified Commercial Services
Aggreko (AGGK.L) Rating (from NEUTRAL) UNDERPERFORM Price (18 Oct 16, p) 957.50 DOWNGRADE RATING Target price (p) (from 1065.00) 740.00 Market Cap (£ m) 2,365.3 Enterprise value (£ m) 2,928.6 Competition risks increasing *Stock ratings are relative to the coverage universe in each analyst's or each team's respective sector. ■ Cut to U/P on competition concerns: We lower our rating on Aggreko to ¹Target price is for 12 months. Underperform (from Neutral) and lower our TP to 740p (from 1065p) Research Analysts reflecting material cuts to our medium term EPS estimates and expected Karl Green returns profile of the group. Significant FX tailwinds support 2016E and 44 20 7888 2629 [email protected] 2017E EPS, masking assumed pricing pressure in the Argentina rebid Andy Grobler, CFA process, but our 2018E EPS fall by 15% as we factor in the impact of 44 20 7883 5943 significant fleet growth from the privately-owned global #2 player. [email protected] ■ Karpowership could displace AGK as the global #1: KPS expects to end 2016E with a fleet c.60% the size of AGK's Utility Power Solutions fleet and, on our analysis, has a current fleet + fleet under construction equivalent to 128% of AGK's historically highest return division. KPS' proven HFO solution already supplies base-load and 'mid-merit' electricity at prices lower than many EM thermal power plants. KPS is also pioneering floating LNG storage & regasification power plants and water desalination ships. KPS is able to target inland customers via interconnectors as well as coastal locations (where the majority of global GDP is generated). AGK's ambitious cost and technology innovation initiatives will continue to make the group a credible global contender in the space, especially in off-grid applications where both falling costs and improving technology (including batteries) continue to stimulate the adoption of distributed power generation. But as the industry matures, we see further scope for margins and returns to be eroded. ■ Catalysts: AGK is scheduled to publish a Q3 update on 16th November. ■ Valuation: AGK trades on 12.4x our revised 2017E EPS, though these estimates are vulnerable to rebid uncertainty, especially in Argentina. The stock trades below its 10Y median P/E and EV/EBITDA multiples, but our DCF and EV/IC analysis (50/50 weighted to derive our 740p target price) which captures future expected dual pressures on returns from increased competition and utility client procurement sophistication. Financial and valuation metrics Year 12/15A 12/16E 12/17E 12/18E Revenue (£ m) 1,561.0 1,606.9 1,803.1 1,812.1 Aggreko is the current global market leader EBITDA (£ m) 556.0 535.3 584.8 587.1 in the provision of temporary power solutions Pre-tax profit adjusted (£ m) 256.00 236.44 265.40 256.30 to a wide range of end market verticals, CS EPS (adj.) (p) 72.60 65.87 73.84 71.17 ranging from short-term emergency response Prev. EPS (p) - 68.79 76.30 83.81 work to the provision of long-term distributed ROIC (%) 12.9 11.2 11.8 11.2 generation capacity in emerging markets. P/E (adj.) (x) 13.2 14.5 13.0 13.5 P/E rel. (%) 81.0 84.7 88.0 102.7 EV/EBITDA (x) 5.1 5.5 5.0 4.8 Aggreko's fleet is principally based on diesel reciprocating engines, though also offers gas Dividend (12/16E, £) 27.12 Net debt/equity (12/16E,%) 52.9 units and is innovating in the areas of HFO Dividend yield (12/16E,%) 2.8 Net debt (12/16E, £ m) 581.9 BV/share (12/16E, £) 4.3 IC (12/16E, £ m) 1,680.8 and hybrid renewable solutions to expand its Free float (%) 100.0 EV/IC (12/16E, (x) 1.8 addressable market. Source: Company data, Thomson Reuters, Credit Suisse estimates
DISCLOSURE APPENDIX AT THE BACK OF THIS REPORT CONTAINS IMPORTANT DISCLOSURES, ANALYST CERTIFICATIONS, LEGAL ENTITY DISCLOSURE AND THE STATUS OF NON-US ANALYSTS. US Disclosure: Credit Suisse does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. 20 October 2016
Aggreko (AGGK.L) Price (18 Oct 2016): 957.50p; Rating: (from NEUTRAL) UNDERPERFORM; Target Price: (from 1065.00p) 740.00p; Analyst: Karl Green Income statement (£ m) 12/15A 12/16E 12/17E 12/18E Company Background Revenue 1,561 1,607 1,803 1,812 Aggreko PLC is engaged in the rental of power generation & EBITDA 556 535 585 587 temperature control equipment. The Company provides its solution Depr. & amort. (281) (277) (296) (311) with 144 service centers & offices in 34 countries & is organized EBIT 275 258 289 277 around 2 lines of business: Local & International Power Projects. Net interest exp. (23) (26) (27) (24) Associates 0 0 0 0 Blue/Grey Sky Scenario PBT 256 236 265 256 Income taxes (64) (64) (74) (72) Profit after tax 192 173 191 184 Minorities -0 -0 -0 -0 Preferred dividends - - - - Associates & other (6) (4) (2) (1) Net profit 186 169 190 183 Other NPAT adjustments (24) (12) (4) (3) Reported net income 162 157 185 180 Cash flow (£ m) 12/15A 12/16E 12/17E 12/18E EBIT 275 258 289 277 Net interest (24) (26) (27) (24) Cash taxes paid (91) (64) (74) (72) Change in working capital (80) (62) (57) 4 Other cash and non-cash items 246 274 298 314 Cash flow from operations 326 380 428 498 CAPEX (254) (294) (337) (330) Free cashflow to the firm 72 87 91 168 Acquisitions (18) 0 0 0 Divestments 17 15 10 10 Other investment/(outflows) 0 0 0 0 Cash flow from investments (255) (279) (327) (320) Net share issue/(repurchase) 2 1 1 1 Dividends paid (70) (69) (71) (75) Issuance (retirement) of debt 6 93 (31) (104) Our Blue Sky Scenario (p) 1335.00 Cashflow from financing (62) 24 (101) (178) Our blue sky scenario of 1335p is predicated on EV/IC analysis Changes in net cash/debt 5 (93) 31 104 which assumes 2018E ROIC of 12.0% in Rental Solutions, 11.9% in Industrial Power Solutionsa and 16.8% in Utility Power Solutions. Net debt at start 494 489 582 551 The key differences vs. our core scenario: (1) the assumption that Change in net debt (5) 93 (31) (104) sustainable growth is higher in Utility and WACC lower as the group Net debt at end 489 582 551 447 successfully migrates to longer term, lower risk contracts and (2) Balance sheet (£ m) 12/15A 12/16E 12/17E 12/18E cost savings and scale benefits catalyse RoIC recovery. Assets Total current assets 747 860 958 963 Our Grey Sky Scenario (p) 495.00 Total assets 2,050 2,170 2,303 2,320 Our grey sky scenario of 495p is predicated on EV/IC analysis which Liabilities assumes 2018E ROIC of 8.5% in Rental Solutions, 7.9% in Total current liabilities 363 406 447 455 Industrial Power Solutionsa and 9.8% in Utility Power Solutions. We Total liabilities 935 1,071 1,081 985 assume 10% WACC in Utility as the group is forced into higher risk Total equity and liabilities 2,050 2,170 2,303 2,320 territories to offset competitive pressure in lower risk markets and Per share 12/15A 12/16E 12/17E 12/18E assume that only the Rental Solutions business is capable of No. of shares (wtd avg.) (mn) 256 257 257 258 beating its risk adjusted WACC on a 3 year view. CS EPS (adj.) (p) 72.60 65.87 73.84 71.17 Prev. EPS (p) - 68.79 76.30 83.81 Share price performance Dividend (p) 27.12 27.12 28.48 29.90 Free cash flow per share (p) 28.16 33.77 35.28 65.26 1,950 Key ratios and valuation 12/15A 12/16E 12/17E 12/18E 1,700 Growth/Margin (%) Sales growth (%) (1.0) 2.9 12.2 0.5 1,450 EBIT growth (%) (11.3) (6.0) 11.8 (4.3) 1,200 Net income growth (%) (14.4) (9.1) 12.3 (3.4) EPS growth (%) (12.1) (9.1) 11.8 (3.5) 950 EBITDA margin (%) 35.6 33.3 32.4 32.4 700 EBIT margin (%) 17.6 16.1 16.0 15.3 Pretax profit margin (%) 16.4 14.7 14.7 14.1 Jan- 15 Jul- 15 Jan- 16 Jul- 16 Net income margin (%) 11.9 10.5 10.5 10.1 AGGK.L FTSE ALL SHARE INDEX Valuation 12/15A 12/16E 12/17E 12/18E EV/Sales (x) 1.8 1.8 1.6 1.6 EV/EBITDA (x) 5.1 5.5 5.0 4.8 The price relative chart measures performance against the FTSE ALL SHARE EV/EBIT (x) 10.4 11.4 10.1 10.2 INDEX which closed at 3804.2 on 18/10/16 Dividend yield (%) 2.83 2.83 2.97 3.12 On 18/10/16 the spot exchange rate was £.89/Eu 1.- Eu.91/US$1 P/E (x) 13.2 14.5 13.0 13.5 Credit ratios (%) 12/15A 12/16E 12/17E 12/18E Net debt/equity (%) 43.9 52.9 45.1 33.5 Net debt to EBITDA (x) 0.9 1.1 0.9 0.8 Interest coverage ratio (x) 12.0 9.9 10.5 11.4 Source: FTI, Company data, Thomson Reuters, Credit Suisse Securities (EUROPE) LTD. Estimates
Aggreko (AGGK.L) 2 20 October 2016
Investment summary ■ Karpowership (KPS), a relatively new entrant to the temporary/bridging power market, expects to end 2016E with a fleet c.60% the size of AGK's Utility Power Solutions fleet. On our analysis, KPS has a current fleet + fleet under construction equivalent to 128% of the capacity of AGK's historically highest return division. ■ KPS' proven HFO solution already supplies base load and 'mid-merit' electricity at prices lower than many EM thermal power plants and is pioneering floating LNG storage and regasification power plants as well as water desalination ships. KPS is able to target inland customers via interconnectors in addition to its core target coastal markets where the majority of global GDP is generated. ■ Limited available data suggests that KPS' capital costs per MW are significantly higher than those of AGK. However, since KPS' solution embeds multiple mobilisation and demobilization cost cycles into its infrastructure, narrow capital cost comparisons are misleading, in our view. In addition, we believe KPS' vessels carry lower risks of physical damage or sequestration in high-risk countries which could provide some pricing advantages. It would thus be over-simplistic to dismiss KPS' longer-term prospects on the basis of high up-front capital costs. ■ AGK's ambitious cost and technology innovation initiatives will continue to make the group a credible global contender in the space, especially in off-grid applications where both falling costs and improving technology (including batteries) continue to stimulate the adoption of distributed power generation. But as the industry matures, we see further scope for AGK's historically very high returns on capital to be eroded. ■ Between 2016E and 2018E we now assume a 350bp margin erosion in Utility PS (ex- Argentina) due to increased competitive pressures and assume a further 400bps between 2018E and 2020E as KPS' fleet launches from the shipyards. This exacerbates margin pressure from the assumed rebasing of 450MW in Argentina. Consequently, our 2018E EPS fall by 15% and our TP falls to 740p, 23% potential downside.
Key risks ■ AGK is a significant USD-earner, deriving 63% of group sales in USD in FY15 and a further 8% in Argentinian Pesos under contracts pegged to the USD rate (though settled in local currency). The sharp devaluation of Sterling post the June referendum thus provides a meaningful FX tailwind to the group EPS profile which is likely to support consensus EPS momentum in the near-term. Any further GBP devaluation present upside risk to CS estimates. ■ AGK's Utility Power Solutions division (56% of group EBITA in 2016E) is an inherently low visibility operation. Though tempting to focus only on the largest 4-5 contracts in the portfolio at any given time, in practice AGK typically has between 110-130 contracts in operation, the sum of which can have a material bearing on the division's overall performance in any given half or full year period. ■ Around 25% of revenues in the Rental Solutions division are derived from emergency response work which can vary from year to year, often in response to varying climatic conditions, such as the propensity of Atlantic hurricanes to make landfall in North America. ■ Rising oil prices are, we think, a net positive for AGK. In the Utility power solutions division, lower fuel prices can stimulate demand for diesel based power solutions, but hamper the fiscal position and GDP of oil exporting nations which acts as a counterbalance. However, in the Rental solutions and Industrial power solutions divisions, greater levels of upstream activity is supportive for the demand for AGK's rental fleet, especially in the North American shale oil & gas fields. ■ In the absence of hard data from current field trials, we could be materially underestimating the competitiveness of AGK's next generation heavy fuel oil (HFO) and gas modular engine technologies which may offer significantly better economics than AGK's or its competitors' current fleet.
Aggreko (AGGK.L) 3 20 October 2016
Karpowership – big growth ambitions Karpowership (KPS) is a provider of floating 'power barges' and is one of Aggreko's growing competitors in the international utility power projects market. We continue to believe that Aggreko's management team are doing all the right things within their control to improve the efficiency of the business and invest in innovation to enhance its competitiveness in the context of an industry which is already suffering from pockets of significant regional overcapacity. However, as we have examined Karpowership (KPS) more closely – both current capabilities and growth/innovation ambitions – we have concluded that KPS is likely to pose a significantly greater threat to AGK in the utility power sector than we had previously appreciated. By the end of the current calendar year, KPS will have broadly doubled its fleet capacity YoY to 3GW (3,000MW) which would make it c.60% the size of AGK's Utility Power Solutions fleet (which accounts for 50% of AGK's total global fleet). Moreover, KPS has a further 3.2GW under construction which will take its current installed fleet plus fleet pipeline up to 6.2GW, which would be c.30% larger than AGK's current utility fleet (Figure 1). An industry press article earlier this year (www.tradewindsnews.com, 5th May 2016) quoted a KPS company official indicating that KPS, "aims to expand its fleet to over 50 units in the next few years, with a total generating capacity of more than 7,500MW." This would take KPS' fleet size to 1.5x larger than AGK's current utility fleet, which could potentially transform KPS from a large regional competitor to the global market leader in the utility power rental space, displacing AGK.
Figure 1: Karpowership growth plans in an industry context (MW)
12000
10000 9644
8000 7500
6168 6000 4828
4000 3000 2058 2000
0 AGK PS Utility fleet AGK total fleet APR Energy (FY15) Karpowership Karpowership Karpowership (H116) (H116) (FY16E) (FY18/19E) (FY20/21E)
Source: Company data, Credit Suisse assumptionsfor 2016-2018 based on KPS company statements and press reports
We provide detailed background information on KPS in the Appendix at the back of this report, but the key questions we believe investors are likely to want the answers to are: (1) Is the potential addressable market big enough to take another large player? (2) Can KPS compete against AGK everywhere or is it geographically constrained? (3) Will KPS be cost competitive against AGK? Given the fact that KPS' ultimate parent, Karadeniz Group, is a privately owned Turkish entity, detailed operational and financial data is scarce, so question (3) is the hardest to answer. In common with other sectors across the Business Services universe where
Aggreko (AGGK.L) 4 20 October 2016
private competitors to larger listed groups often thrive, lower hurdle rates for RoCE often compensate for an initial lack of scale. However, private businesses are often freer to pursue longer-term strategic agendas which may, over time, narrow the gap in terms of the most important financial KPIs. The utility power solutions market The market for utility power solutions in emerging markets, both in terms of temporary and longer-term bridging solutions, is driven by population growth, industrialization and urbanization, set against supply constraints driven by underinvestment in both permanent generation capacity and transmission & distribution infrastructure. As EM GDP growth is projected by the IMF to grow more quickly than developed markets, AGK has estimated that the 'power gap' (unmet electricity demand leading to brownouts and blackouts) will grow by 6% CAGR over the 2014-19E period, as shown in Figure 2
Figure 2: Aggreko estimate of power shortfall growth vs. GDP
Source: EIA; Platt's; Country Research; Economist; IMF; World Bank
Although AGK revised down its estimate of the global projected shortfall by 2020E from 195GW to 105GW at its August 2015 strategy presentation due to a tighter methodology and lower EM GDP growth outturns and forecasts after 2012, 105GW would still represent a significant theoretical opportunity. However, the extent to which EM nations are willing or able to tolerate shortfalls (in terms of just accepting power shortages as a fact of life, along with the foregone GDP opportunity) has always been a moot point (as we discussed in our November 2014 note The rise of distributed generation) Historical experience in the sector points to EM nations having a tendency to procure temporary/bridging power to supply major industrial mining and extractives projects and to supplement hydro-electric power shortages to a greater extent than a pure social drive to improve the lot of citizens. (Though of course, such GDP positive actions may have direct and indirect benefits for citizens.) As we have discussed in previous research, citizens and corporates in those countries with chronic power shortages often deploy their own backup power and storage, ranging from very old, small-scale diesel generators and unsophisticated lead-acid battery banks to more sophisticated, larger scale diesel and gas reciprocating engines. This 'off-grid' capacity is intrinsically very hard to measure (a task which is compounded by power theft) and thus previous estimates of the temporary power solutions market have historically been heavily caveated (8,400MW +/-10% based on MW on hire). Indeed, Aggreko's current management team has stopped talking about market share data altogether which we think is consistent with its tighter definition of the market opportunity which captures an element of this nebulous off-grid capacity.
Aggreko (AGGK.L) 5 20 October 2016
Figure 3: Last estimated market share data (2012) Figure 4: AGK divisional revenue split 2015A
Rental Other Utility ex PtF Solutions 34% 41% 41% Aggreko 45%
Industrial APR 18% 21%
Source: Company data Source: Company data
As can be seen in Figure 3, Aggreko was estimated to be more than twice the size of APR Energy in 2012, although the combined fleet of regional Caterpillar dealers (captured in 'Other') also represented a globally present brand, albeit with service levels reported to vary by region. KPS was barely on the radar at this point in time. Of course the estimate of 8.4GW of fleet on rent is now well out of date, but as just another contextual touchpoint, were KPS to run with 85% physical utilization on 7.5GW of fleet, the implied 6.4GW of fleet on rent would be equivalent to c.75% of the total market as it stood just 4 years ago – and that was before the subsequent collapses in demand from the metals & mining and oil & gas sectors. Clearly, the incremental 4.5GW of KPS capacity (vs. 2016E year-end) will not hit the market all in one go and KPS management will be able to scale back its ambitions if market demand undershoots its budget expectations, but it is hard to escape the conclusion that KPS current fleet under construction and medium-term ambitions to exceed 7.5GW marks a very substantial expansion of the global supply base for temporary and bridging power. KPS potential geographic reach An instinctive response to a ship-based, floating power station is that it is limited to coastal population centres and perhaps along certain major rivers. For example, the capital of land-locked Chad, N'Djamena is located >1,100km from the Atlantic coast – one would think not an obvious opportunity for a power barge. However, there are some key observations which would suggest that KPS can target a substantial proportion of AGK's opportunity base. ■ According to the UN Environment Programme, half of the world's population lives within 60km of the sea and three-quarters of all large cities are located on the coast ■ The IPCC estimates that population densities in coastal regions at around 3x the global average ■ The UN has also estimated that close to 60% of China's population live in in 12 coastal provinces, along the Yangtze River valley, and in two coastal municipalities (Shanghai and Tianjin) ■ The US National Ocean Service estimates that 14% of US counties which are adjacent to the coast produce 45% of the nation's GDP
Aggreko (AGGK.L) 6 20 October 2016
We have been unable to find a neat estimate of the proportion of global GDP that is produced, say, within 100km of the coast, but it seems likely that the majority of global GDP is produced near the coast or along major rivers, accessible to large ships and barges. This is a strong starting point and potentially explains why KPS has such a large fleet under construction. Inland markets are already being served by KPS A key dynamic which is important to consider in the context of both developed and developing markets' power infrastructure is the use of cross-border interconnectors which provide mutual benefits to many countries in terms of addressing both intra-day and longer-term supply/demand imbalances, as well as providing more economically effective power trading opportunities. This makes it all the more notable that KPS is currently has a 111MW powership deployed to supply Zambia via a Mozambique interconnector. Lusaka, Zambia's capital is more than 1,000km away from the coast and significantly further if the interconnector does not cross through Zimbabwe. That is not to say that KPS will have the ability to target all land-locked opportunities as many inland power utility opportunities have inadequate transmission & distribution infrastructure which would prevent KPS from being a viable supplier. However recent estimates of the scale of the size of the global 'off-grid' market suggest that this market is still a relatively small source of power generation. Navigant Research's 'Microgrid Deployment Tracker 2Q16 identified 15.6GW of projects in operation, proposed and under development, with North America at 42% capacity market share and Asia-Pacific at 39%. In context, this represents only c.20% of the UK's total electricity generation capacity. Of course, Aggreko can legitimately argue that it can continue to 'create' its own markets as it has done over the past 15 years of pioneering market expansion. Therefore, as distributed generation capacity grows substantially over the coming years, as technology costs continue to fall and battery storage capabilities continue to increase (supporting accelerated off-grid renewable and hybrid generation roll-out), this addressable market should continue to expand. This is the key reason we are much more sanguine about the growth outlook for Aggreko's Power Solutions Industrial division, compared to its Power Solutions Utility division. However, in terms of KPS' ability to create a solution that plugs into existing T&D infrastructure in EMs and thus serve many key utility customers who, as AGK has already recognized, have an increasing preference for bridging power as opposed to classic temporary power, its coastal-orientated proposition is likely to appeal to many, if not most, of Aggreko's target utility customers. KPS technology proposition In KPS own words, "Powerships are designed and built utilizing the latest in dual fuel engine technology, operating combined fuel and gas cycles to maximize efficiency. Fuel flexibility through HFO, Natural Gas or LNG ensures the lowest cost of delivered power with no capital outlay. Powerships are turnkey integrated power solutions which accommodate all requirements of generating and delivering power. From fuel storage to high voltage substation, all equipment and processes are on-board. The power is fed directly into the transmission network from Powership’s on-board EHV substation at country’s voltage and frequency level. Powerships are equipped with state of the art electrical systems that enables flexible and smooth electrical connection." The two key takeaways from the above are that, (1) the ability to deliver HFO (heavy-fuel oil) solutions will be key driver of attractive total cost/MW solutions, given the lower calorific equivalent cost of HFO vs. diesel (c.15% saving presently vs. c.20% saving when oil was at $100bbl); and (2) KPS' powerships are fully integrated power plant, fuel storage and substations, which means that equipment costs can only fairly be compared on a site- equivalent basis, not purely on the cost of the generation modules.
Aggreko (AGGK.L) 7 20 October 2016
As we have previously stated operational and financial data is incredibly scarce for KPS beyond basic fleet capacity metrics. However, Cordiant Capital, one of the providers of project finance for the 110MW ship, 'Zeynep Sultan' (currently operational in Indonesia) indicated on its website that the project cost was $107m (25% equity financed), equivalent to $973k/MW. If we compare this to the total cost of AGK's tangible fixed assets (excluding property) per MW of power fleet (which is harsh, since this includes the unknown original cost of AGK's 1.1GW industrial cooling fleet), this amounts to just $525k/MW which is a considerable 85% cost differential. However, crucially, 82% of AGK's power fleet (by MW) in FY15 was the cheap, reliable and simple diesel generators ('gensets'), whereas KPS is using the more expensive and flexible HFO engines which we know to be more expensive. AGK's new medium speed HFO modular gensets, which are due to come to market in early 2017, is based on the 1.8MW MAN 9L21/31 engine, whereas KPS is using a far bigger power plant, also supplied by MAN under framework, at 18.9MW units (18V 51/60 engines). Some observers have, according to AGK, significantly overestimated the unit costs of its HFO solutions. Whilst we may be able to estimate the individual engine cost, the total cost of the two 40ft ISO containers (one of which contains the cooling systems for the engine), along with all ancillary components and equipment – inverters, cabling, control systems, fuel storage - on a per MW basis is very difficult to determine. However, were we to assume a cost of $750k/MW for AGK, the capital cost differential would still be in the region of 40% higher for KPS. KPS bundles future opex in its vessel capex; makes comparison of economics with AGK tricky This raises further imponderables: KPS' solution effectively embeds many mobilisation and demobilization costs into its fixed infrastructure – site preparation, intra-site connection and control costs, local employee training and development. All costs which AGK will have to bear as opex over the life of an asset. Given the average contract duration of 12 months and an average depreciated life of 8-9 years, each AGK genset will, over the course of its useful economic life, have a capitalised equivalent level of mobilisation and 'de-mob' costs which are, by design, avoided in the KPS solution. In addition, on the basis that KPS has its own internal logistics system inherent to each ship whereas AGK relies on a network of land, sea and air-based third-party logistics providers with incremental, effectively off-balance-sheet assets, to look through the lens of the respective assets' capital costs is, in our view, far too narrow. Therefore, in our view, the only meaningful way to judge the competitiveness of KPS vs. AGK would be all-in price per MW over a LfL rental period – data which is commercially sensitive and to which we do not have access. There will be other technical considerations to bear in mind such as the relative efficiency and performance of the respective engine sizes, differing levels of maintenance intensity (maintaining 10 1.8MW engines could be more expensive than overhauling a single 18.9MW engine) Above all else, KPS' fleet is unlikely to be suitable for contracts lasting less than 3 years, with the sweet spot being in the 5-10 year period. But since Aggreko has highlighted a clear shift in the Utility market towards multi-year contracts, prospective customers are only likely to be interested in 'total cost of power' comparisons. Potentially lower risk of asset sequestration In addition to capex and opex considerations, KPS' business model may also have a moderately lower operational risk profile than that of AGK. Former AGK management were always very upfront about the fact that the group's high returns on capital needed to be viewed through the prism that AGK was often operating in high risk countries "where others fear to tread" (as the CEO put it). In the case of KPS, in the event that high risk customers become problematic from a payment or security perspective (for example,
Aggreko (AGGK.L) 8 20 October 2016
Venezuela, Libya and Yemen where AGK has faced such challenges), the ability to retrieve assets (or, potentially just as powerfully from a negotiating perspective, merely raise the risk of retrieval) is easier in terms of raising the anchor and sailing away, compared to the complex logistics of inland demobilization and transportation. Whether KPS or its insurers have the capability of accurately assessing an, more importantly, pricing geopolitical risks is something of an unknown, but it is feasible in our view that this could be competitive advantage for KPS. Beyond the fact that we only have one statistic concerning one of the smaller vessels in KPS' fleet to go on, all we can really conclude is that it would be over-simplistic and rash to dismiss KPS' longer-term prospects on the basis of high up-front capital costs, given the plethora of other cost and risk variables which will feed into KPS' tariffs. Future KPS initiatives set to provide competitive differentiation KPS has referenced two projects which could enhance its competitive proposition vis-à-vis AGK: ■ Desalination: KPS is developing 'watership' capabilities to desalinate seawater for key clients. This would allow KPS and its customers the opportunity to maximise generation output in times of low on-shore power demand and divert energy to the relatively power hungry de-sal process. For many freshwater-poor clients in Africa and the Middle East, this would be a potentially very attractive proposition, without the need to commit capital to permanent de-sal plants. ■ LNG Power Islands: KPS is developing the first ever floating LNG storage and regasification units (FSRUs), or 'Power Islands' to take advantage of increased global availability of LNG and to provide fuel flexibility/cost advantages to some customers. With availability of gas supply a key barrier to the wide uptake of gas reciprocating and gas turbine engines, the development of FSRU's with major storage capacity and easy unloading access for LNG tankers could dramatically increase the uptake of the 'power barge' proposition and also solve emissions barriers to operating in developed markets.
Aggreko (AGGK.L) 9 20 October 2016
Estimate changes We make two principal adjustments to our estimates in this note, with changes highlighted in Figure 5. Firstly, we adjust for recent FX movements, most notably the weakening of Sterling vs. the US Dollar, and secondly, we lower our medium-term margin estimates in Utility Power Solutions (PS) to reflect the assumption of lower pricing in Argentinian rebids (we assume margins halve from 35% in 2015A to 17% by 2018E).
Figure 5: Aggreko – estimate changes 2016E 2017E 2018E £m Old New ∆ (%) Old New ∆ (%) Old New ∆ (%) Revenue (ex-PtF) 1565 1557 -0.5% 1657 1753 5.8% 1723 1761 2.2% EBIT (ex-GoS) 257 253 -1.5% 281 285 1.8% 301 273 -9.1% Margin (ex-GoS) 16.3% 16.3% 16.4% 16.3% 17.1% 15.5% Adj. PBTA (inc-GoS) 242 236 -2.4% 270 265 -1.9% 298 256 -13.9% EPS (AGK definition) (p) 67.7 64.8 -4.3% 75.2 72.7 -3.3% 82.7 70.1 -15.3% EPS (underlying, CS definition) (p) 68.8 65.9 -4.3% 76.3 73.8 -3.2% 83.8 71.2 -15.1%
Source: Credit Suisse estimates Note: Revenues in this table differ from those at the front of this note as they exclude pass-through-fuel for more meaningful margin calculations
Between 2016E and 2018E we now assume a 350bp margin erosion in Utility PS (ex- Argentina) due to increased competitive pressures, especially from Karpower, and assume a further 400bps between 2018E and 2020E as Karpower's fleet launches from the shipyards. By contrast, we look for margin improvements in both Rental Solutions (the former developed markets, 'Local' activities) and in Industrial PS, as we assume some recovery in Rental Solutions due to the stabilization of the oil price and ongoing strength in Russia and the Middle East along with good secular growth in the distributed generation trend benefiting the Industrial PS business. We expect both divisions to be the primary beneficiaries of the group's cost cutting actions, although do expect some reinvestment into pricing actions in the most competitive markets. A summary of the drivers of our group margin estimates over the 2016E-20E period are shown in Figure 6 below. We have assumed in our model that AGK successfully rebids all of its current 450MW capacity in Argentina over the next 12 months at rates 20% lower than those agreed at the outset of the initial contract in 2008, We assume that 80% of this price decrease drops through to the bottom line, which is the key driver of the margin reset.
Aggreko (AGGK.L) 10 20 October 2016
Figure 6: AGK group margin (ex pass-through fuel) drivers – 2016E-20E
19.0%
18.0% 0.5% 1.1% 17.0% 1.0%
16.0% 2.0%
15.0% 0.1% 16.3%
14.0% 14.7%
13.0% 2016E Rental Solutions Industrial PS Argentina Utility Other Utility PS Mix shift (net) 2020E PS
Source: Credit Suisse estimates
Whilst this acts as a meaningful margin drag on the group, Figure 6 highlights that the impact of competitive pressure in the Utility market (ex-Argentina) is the dominant downward force on the group margin. The very small mix shift positive reflects the fact that we assume that we assume that the Industrial PS division will be the highest margin division by 2019E and we assume to be growing faster than both Rental Solutions and the Utility business, where we now forecast modest revenue shrinkage over the period. Valuation We continue to value AGK by reference to a 50/50 weighting between DCF analysis and divisional EV/IC analysis which we believe to be an appropriate supplementary valuation tool for asset intensive industries such as equipment rental. Summaries of our DCF and core EV/IC analysis are shown in Figure 9 and Figure 10. Given that AGK has no peers in the rental space with such a heavy exposure to EMs or such a focused niche in temporary power solutions, we do not believe that wider Business Services sector comparator analysis is particularly instructive. However, we highlight AGK's historical consensus valuation metrics to provide some context for the group's current multiples in Figure 7 and Figure 8 . As can be seen, AGK is trading comfortably below its 10 year median EV/EBITDA and P/E multiples, but we see this as explained by the fundamental changes in the competitive environment, EM demand in key geographies and sectors (driven by the fall in extractives activity and weaker budgets of key government-backed Utility customers) and changing customer procurement behavior. These factors have already led to a significant drop in the group's RoCE from its 2010 peak, as shown in Figure 7, highlighting why we believe EV/IC analysis should be considered in determining fair value for the shares.
Aggreko (AGGK.L) 11 20 October 2016
Figure 7: AGK – EV/EBITDA history Figure 8: AGK – P/E history
11.0 30.0% 25.0
10.0 25.0% 20.0 9.0
8.0 20.0% 15.0 7.0 10.0 6.0 15.0%
5.0 10.0% 5.0 4.0
3.0 5.0% 0.0 01/10/2006 01/11/2008 01/12/2010 01/01/2013 01/02/2015 01/10/2006 01/07/2008 01/04/2010 01/01/2012 01/10/2013 01/07/2015
12m fwd EV/ EBITDA 10Y Median multiple ROCE 12m fwd P/E 10Y Median
Source: Thomson Reuters Datastream, Credit Suisse estimates Source: Thomson Reuters Datastream
In common with the other stocks within our coverage, we use 5 years of explicit forecasts in our DCF analysis, then hold RoNA flat for a further 5 years before fading RoNA towards the cost of capital thereafter. Given that AGK has only a very limited M&A track record, we do not assume any future value from M&A in our target price.
Figure 9: Aggreko – summary of key DCF inputs Drivers 2015A 2016E 2017E 2018E 2019E 2020E Assumptions Period 1 Period 2 Final year Sales growth -1.0% 2.9% 12.2% 4.0% 4.0% 4.0% First year of estimates 2016 2021 2026 EBITDA margin 35.6% 33.3% 32.4% 32.4% 32.4% 32.7% Years of period 5 5 15 EBITA margin 17.9% 16.3% 16.2% 15.5% 14.8% 14.4% Final year of period 2020 2025 2040 Depreciation / sales 17.7% 17.0% 16.2% 16.9% 17.6% 18.3% Working capital/Sales 23.5% 27.2% 27.4% 27.4% 27.4% 27.4% Average sales growth 5% 4% 4% Capex/Sales 15.2% 17.3% 18.1% 15.0% 15.0% 15.0% Final EBITA margin 14% 15% 11% Tax rate 25.1% 25.7% 25.8% 27.5% 27.5% 27.5% Final Capex sales 15% 15% 15% RONA 13.2% 11.7% 12.7% 11.7% 11.2% 11.0% Final Capex / depn 106% 108% 106% Final year RONA 11% 11% 9% Net sales 1,561 1,607 1,803 1,812 1,830 1,851 EBITA 279 263 293 281 271 267 Risk free rate 2.0% NOPAT 209 195 217 208 199 195 Market risk premium 6.5% Add back depreciation 277 273 292 307 322 338 Beta 1.1 Increase in NWC -80 -62 -57 4 -5 -6 Normalised tax rate 27.5% Capex -237 -279 -327 -320 -316 -312 Terminal growth 2.0% Other 11 -7 3 3 3 3 Fade rate 10.0% Acquisitions and disposals 18 0 0 0 0 0 Sustainable RoNA 11.2% Free cash flow (FCF) 198 120 128 201 204 218 WACC 8.1% 7.9% 8.0% 8.2% 8.4% 8.6%
PV of FCF (£mn) 2,072 PV of terminal FCF (£mn) 392 EV (£mn) 2,464 Adj Net Debt (2015) (£mn) 489 Mkt Cap (£mn) 1,975 Shares (mn) 257 Value/Share (pence) 768
Source: Company data, Credit Suisse estimates
Our revised 740p target price is based on a 50/50 weighting of the DCF and EV/IC valuations, which suggests 23% downside as against the current share price, hence our move to an Underperform rating (from Neutral).
Aggreko (AGGK.L) 12 20 October 2016
Figure 10: Aggreko – summary EV/IC-based sum-of-the-parts analysis £m 2015 2016E 2017E 2018E Rental Solutions ROIC 12.1% 7.9% 8.6% 9.0% WACC 6.5% 6.5% 6.5% 6.5% g 3.0% 3.0% 3.0% 3.0% Implied EV/IC 2.60 1.39 1.60 1.71 IC 562 586 663 683 EV 1461 812 1061 1166 Industrial ROIC 7.3% 7.5% 7.7% 7.9% WACC 8.5% 8.5% 8.5% 8.5% g 4.0% 4.0% 4.0% 4.0% Implied EV/IC 0.73 0.78 0.82 0.88 IC 414 443 517 543 EV 302 346 423 476 Utility inc. PtF ROIC 13.5% 13.8% 13.3% 11.8% WACC 9.0% 9.0% 9.0% 9.0% g 2.0% 2.0% 2.0% 2.0% Implied EV/IC 1.65 1.69 1.61 1.39 IC 723 736 809 774 EV 1192 1244 1303 1078 Total EV 2955 2402 2787 2720 Tax & finance payable -59 -59 -59 -59 Derivative financial instruments -6 -6 -6 -6 Borrowings (excluding overdraft) -511 -604 -573 -469 Retirement benefit obligation -2 -2 -2 -2 MV 2377 1731 2147 2185 Average number of shares 256 257 257 258 Implied share price (£) 9.29 6.75 8.35 8.48 Blended WACC 7.71% 8.08% 7.97% 7.84% Discount factor 0.980 0.908 0.842 Discounted value (£) 6.62 7.58 7.14 Average (£) 7.11 Current price (£) 9.58 Upside/downside -26%
Source: Credit Suisse estimates
Aggreko (AGGK.L) 13 20 October 2016
Financials
Figure 11: Income statement Year end 31 December (£m) 2013 2014 2015 2016E 2017E 2018E 2019E 2020E Revenue (inc. pass through fuel) 1573 1577 1561 1607 1803 1812 1830 1851 Trading profit (pre gain on sale/amortisation) 357 309 274 257 289 277 268 264 Memo: Reported TP post amortisation 352 306 270 253 285 273 268 264 Gain/(loss) on fixed asset disposals 6 4 5 5 3 3 3 3 Amortisation of acquisition intangibles -5 -3 -4 -4 -4 -4 0 0 EBIT 358 310 275 258 289 277 271 267 Exceptional items 0 0 -26 -12 -2 0 0 0 Net finance costs -25 -21 -23 -26 -27 -24 -19 -14 PBT (reported) 333 289 226 220 259 252 252 253 PBT (adjusted) 338 292 256 236 265 256 252 253 Memo: PBT before exceptional items (AGK definition) 333 289 252 232 261 252 252 253 Tax charge -87 -74 -64 -64 -74 -72 -72 -72 Adjusted tax charge -88 -75 -70 -67 -76 -73 -72 -72 Attributable profit (reported) 246 215 162 157 185 180 180 181 Attributable profit (CS adjusted) 249 217 186 169 190 183 180 181 Memo: PAT before exceptional items (AGK definition) 246 215 183 166 187 180 180 181
Per share data Shares in issue (m) Average for period 267 261 256 257 257 258 258 259 Fully diluted 267 261 256 257 257 258 258 259 At period end 269 256 256 257 257 258 258 259 EPS (reported) 92.2 82.6 63.5 61.0 72.2 70.1 69.7 70.0 EPS (adjusted) 92.2 83.2 72.6 65.9 73.8 71.2 69.7 70.0 Memo: Adjusted EPS (AGK definition) 92.2 82.6 71.7 64.8 72.7 70.1 69.7 70.0 EPS (fully diluted, adjusted)* 92.0 83.2 72.6 65.9 73.8 71.2 69.7 70.0 DPS 26.30 27.12 27.12 27.12 28.48 29.90 31.39 32.96 Growth Turnover (ex pass-through fuel from 2007) -0.8% -0.1% -1.8% 3.7% 12.6% 0.5% 1.0% 1.1% EBIT -7.3% -13.3% -11.3% -6.0% 11.8% -4.3% -2.1% -1.5% Reported EPS -11.5% -10.4% -23.1% -3.9% 18.3% -2.9% -0.5% 0.4% Adj. EPS -9.5% -9.7% -12.8% -9.3% 12.1% -3.6% -2.0% 0.4% DPS 10.0% 3.1% 0.0% 0.0% 5.0% 5.0% 5.0% 5.0% P&L ratios EBITA (inc. GoS) / revenue (inc. PtF) 23.0% 19.8% 17.9% 16.3% 16.2% 15.5% 14.8% 14.4% Tax rate (reported) 26.2% 25.6% 28.3% 29.0% 28.5% 28.5% 28.5% 28.5% Tax rate (adjusted) 26.1% 25.6% 27.4% 28.5% 28.5% 28.5% 28.5% 28.5% Dividend cover (x) 3.5 3.0 2.3 2.2 2.5 2.3 2.2 2.1 Interest cover (x) 14.3 14.7 11.9 9.9 10.6 11.4 13.9 19.1
Source: Company data, Credit Suisse estimates
Aggreko (AGGK.L) 14 20 October 2016
Figure 12: Cash flow statement Year end 31 December (£m) 2013 2014 2015 2016E 2017E 2018E 2019E 2020E EBITA (post exceptionals) 363 313 253 250 291 281 271 267 Depreciation 273 259 277 273 292 307 322 338 Amortisation of NARIAs 0 0 0 0 0 0 0 0 EBITDA 636 572 530 523 583 587 593 605 Working capital change -19 -73 -80 -62 -57 4 -5 -6 Gain on FA sale -6 -4 -5 -5 -3 -3 -3 -3 Share-based payments -2 3 6 6 7 7 7 7 Provision movements -6 0 10 -8 0 0 0 0 Other -1 0 0 0 0 0 0 0 Operating cash flow 603 498 461 454 529 594 592 602 Net capex -214 -239 -237 -279 -327 -320 -316 -312 Memo: Fleet capex (gross) -205 -226 -237 -274 -314 -308 -303 -300 Interest -26 -20 -24 -26 -27 -24 -19 -14 Tax -68 -77 -91 -64 -74 -72 -72 -72 Free cash flow 295 162 109 86 101 178 185 204 Dividends -66 -70 -69 -69 -71 -75 -78 -82 Special dividend 0 -198 -1 0 0 0 0 0 Net proceeds from issue of ordinary shares 1 3 2 1 1 1 1 1 Other (inc. purch of T-shares/sale of EBT shares) -1 0 0 0 0 0 0 0 Acquisitions/disposals 0 -4 -18 0 0 0 0 0 FX impact 1 -24 -18 -110 0 0 0 0 Other 1 0 0 0 0 0 0 0 Net movement 231 -131.2 5.0 -92.9 30.9 104.3 107.5 122.2 Opening net (debt)/cash -593 -363 -494 -489 -582 -551 -447 -339 Closing net (debt)/cash -363 -494 -489 -582 -551 -447 -339 -217
Cash flow ratios Tax paid / tax charged 78% 104% 142% 100% 100% 100% 100% 100% Interest paid / interest charged 104% 95% 104% 100% 100% 100% 100% 100% Depreciation / sales (pre-PtF) 17.8% 16.9% 18.5% 17.5% 16.7% 17.4% 18.1% 18.8% PP&E capex / sales (pre-PtF) 14.9% 16.4% 16.3% 18.2% 19.8% 18.4% 17.1% 13.7% PP&E capex / depreciation (x) 0.84 0.97 0.92 1.08 1.16 1.08 1.01 0.95 Working capital ∆ / revenue (pre-PtF) ∆ -1.2% -9.8% n/m -9.0% -9.0% -9.0% -9.0% -9.0% FCF / sales (pre-PtF) 18.7% 10.3% 7.0% 5.3% 5.6% 9.8% 10.1% 11.0% FCF / adjusted net income 118% 75% 59% 51% 53% 97% 103% 113% FCF / dividend (x) 4.5 2.3 1.6 1.2 1.4 2.4 2.4 2.5 Net debt / EBITDA (x) 0.6 0.9 0.9 1.1 0.9 0.8 0.6 0.4 Net debt / FCF (x) 1.2 3.0 4.5 6.8 5.5 2.5 1.8 1.1
Source: Company data, Credit Suisse estimates
Aggreko (AGGK.L) 15 20 October 2016
Figure 13: Balance sheet Year end 31 December (£m) 2013 2014 2015 2016E 2017E 2018E 2019E 2020E Fixed assets Goodwill 133 130 118 118 118 118 118 118 Intangible assets 18 18 16 12 8 4 4 0 Property, plant & equipment 1165 1177 1139 1150 1188 1205 1203 1180 Deferred tax asset 23 22 30 30 30 30 30 30 Total 1339 1347 1,303 1,310 1,344 1,357 1,355 1,328 Current assets Stocks 149 163 189 202 219 211 213 216 Trade & other receivables 417 474 476 576 657 669 681 694 Financial assets (derivatives) 11 5 1 1 1 1 1 1 Cash and cash equivalents 38 37 48 48 48 48 48 48 Tax assets 21 21 33 33 33 33 33 33 Total 636 700 747 860 958 963 977 992 Total assets 1975 2047 2,050 2,170 2,303 2,320 2,331 2,320 Creditors <1yr Borrowings -36 -76 -31 -31 -31 -31 -31 -31 Derivatives -1 -1 -1 -1 -1 -1 -1 -1 Trade & other creditors -300 -303 -259 -310 -351 -359 -369 -378 Current tax liabilities -68 -67 -64 -64 -64 -64 -64 -64 Provisions 0 0 -8 0 0 0 0 0 Total -405 -447 -363 -406 -447 -455 -465 -474 Long term liabilities >1yr Borrowings -365 -455 -506 -599 -568 -464 -356 -234 Derivatives -8 -7 -6 -6 -6 -6 -6 -6 Deferred tax liabilities -51 -53 -58 -58 -58 -58 -58 -58 Retirement benefit obligation -6 -7 -2 -2 -2 -2 -2 -2 Total -430 -522 -572 -665 -634 -530 -422 -300 Net assets 1140 1078 1,115 1,099 1,221 1,335 1,444 1,546 Capital & reserves Called up share capital 49 42 42 42 42 42 42 42 Share premium account 20 20 20 20 20 20 20 20 Treasury shares -24 -14 -9 -9 -9 -9 -9 -9 Capital redemption/hedging reserve 6 13 13 13 13 13 13 13 Hedging reserve (net of DT) -1 -4 -4 -4 -4 -4 -4 -4 Retained earnings 1162 1102 1,202 1,186 1,308 1,422 1,531 1,633 Other reserves (exchange) -72 -81 -149 -149 -149 -149 -149 -149 Total shareholders' funds 1140 1078 1,115 1,099 1,221 1,335 1,444 1,546
Balance sheet ratios Stocks / sales (ex-PtF) 10.7% 10.2% 11.8% 13.0% 12.5% 12.0% 12.0% 12.0% Receivables / sales (ex-PtF) 27.4% 29.1% 31.4% 37.0% 37.5% 38.0% 38.3% 38.6% Payables / operating costs 26.2% 23.8% 22.7% 23.0% 23.2% 23.4% 23.6% 23.8% NAV/share (p) 427 413 436 428 475 518 560 598 Gearing 31.8% 45.8% 43.9% 52.9% 45.1% 33.5% 23.5% 14.0%
Source: Company data, Credit Suisse estimates
Aggreko (AGGK.L) 16 20 October 2016
Appendix – Karpowership background information
Figure 14: KPS – current fleet deployment by Figure 15: KPS – vessel classes in fleet and under location construction
Other Iraq 20% 30%
Ghana (PF) 27% Lebanon 23%
Source: Company data, Credit Suisse research (Ghana pro forma for Osman Bey vessel Source: Company deployed in H116)
Figure 16: KPS – class specifications Max. capacity MW Length (m) Width (m) Depth (m) Khan 470 300 50 5 Onur 420 285 45 5 Orka 235 142 42 5 Shark 125 180 32 5 Dolphin 100 100 32 5 Seal 37 84 18 5
Source: Company data
Figure 17: KPS – current fleet in operation Power capacity Current deployment Vessel name (MW) location Arrival date Zeynep Sultan 125 Indonesia, Amurang 02/12/2015 Aysegul Sultan 235 Ghana, Tema Harbour 28/12/2015 Orhan Bay 203 Lebanon 2013 Fatmagul Sultan 203 Lebanon 2014 Irem Sultan 111 Mozambique/Zambia 2016 Ali Can Bey 104 n/a n/a Kaya Bey 216 Iraq n/a Rauf Bey 180 Iraq n/a Dogan Bey 126 Iraq n/a Total 1503
Source: Company data, Credit Suisse research
Aggreko (AGGK.L) 17 20 October 2016
Figure 18: KPS – fleet under construction Power capacity Vessel name (MW) Osman Khan 470 Orhan Ali Khan 470 Orka Sultan 415 Onur Sultan 415 Suheyla Sultan 400 Yurdanur Sultan 400 Deniz Sultan 400 Ela Sultan 400 Osman Bey 235 Nuray Sultan 125 Ibrahim Bey 110 Mehmet Bey 110 Gokhan Bey 110 Yasin Bey 110 Sir Patrick 110 Belgin Sultan 74 Goksel Bey 73 Metin Bey 73 Ebru Sultan 68 Erol Bey 60 Faruk Bey 37 Total 4665
Source: Company data
Figure 19: KPS – brief company history 2002 First company to be granted >1 licence in liberalised energy sector in Turkey 2009 Started design & build of Powerships 5 ships were built + became operational 2010 Powership ® becomes company trademark 2016 Khan class powerships (470MW) to be launched in H2
Source: Company data
Aggreko (AGGK.L) 18 20 October 2016
Companies Mentioned (Price as of 18-Oct-2016) Aggreko (AGGK.L, 957.5p, UNDERPERFORM, TP 740.0p) Caterpillar Inc. (CAT.N, $87.22)
Disclosure Appendix Important Global Disclosures Karl Green and Andy Grobler, CFA, each certify, with respect to the companies or securities that the individual analyzes, that (1) the views expressed in this report accurately reflect his or her personal views about all of the subject companies and securities and (2) no part of his or her compensation was, is or will be directly or indirectly related to the specific recommendations or views expressed in this report.
3-Year Price and Rating History for Aggreko (AGGK.L)
AGGK.L Closing Price Target Price Target Price Closing Price AGGK.L Date (p) (p) Rating 2,000 28-Oct-13 1616.60 1407.49 U 30-Jun-14 1650.00 1471.00 04-Nov-14 1455.00 1240.00 * 1,500 24-Jul-15 1255.00 1000.00 07-Aug-15 1091.00 1065.00 N 1,000 * Asterisk signifies initiation or assumption of coverage.
500 01- Jan- 2014 01- Jan- 2015 01- Jan- 2016
U N D ERPERFO RM N EU T RA L
3-Year Price and Rating History for Caterpillar Inc. (CAT.N)
CAT.N Closing Price Target Price Target Price Closing Price CAT.N Date (US$) (US$) Rating 125 24-Oct-13 84.53 94.00 O 15-Jan-14 92.41 103.00 24-Apr-14 105.28 117.00 100 24-Jul-14 105.04 119.00 15-Oct-14 92.59 108.00 75 23-Oct-14 99.27 109.00 08-Jan-15 88.71 100.00 50 27-Jan-15 79.85 90.00 01- Jan- 2014 01- Jan- 2015 01- Jan- 2016 23-Apr-15 84.79 92.00 23-Jul-15 76.88 89.00 O U T PERFO RM 24-Sep-15 65.80 75.00 22-Oct-15 70.88 78.00 12-Jan-16 61.60 72.00 04-Apr-16 75.72 87.00 26-Jul-16 82.75 90.00 13-Oct-16 86.97 102.00 * Asterisk signifies initiation or assumption of coverage. The analyst(s) responsible for preparing this research report received Compensation that is based upon various factors including Credit Suisse's total revenues, a portion of which are generated by Credit Suisse's investment banking activities As of December 10, 2012 Analysts’ stock rating are defined as follows: Outperform (O) : The stock’s total return is expected to outperform the relevant benchmark* over the next 12 months. Neutral (N) : The stock’s total return is expected to be in line with the relevant benchmark* over the next 12 months. Underperform (U) : The stock’s total return is expected to underperform the relevant benchmark* over the next 12 months. *Relevant benchmark by region: As of 10th December 2012, Japanese ratings are based on a stock’s total return relative to the analyst's coverage universe which consists of all companies covered by the analyst within the relevant sector, with Outperforms representing the most attractive, Neutrals the less attractive, and Underperforms the least attractive investment opportunities. As of 2nd October 2012, U.S. and Canadian as well as European ratings are based on a stock’s total return relative to the analyst's coverage universe which consists of all companies covered by the analyst within the relevant sector, with Outperforms representing the most attractive, Neutrals the less attractive, and Underperforms the least attractive investment opportunities. For Latin American and non-Japan Asia stocks, ratings are based on a stock’s total return relative to the average total return of the relevant country or regional benchmark; prior to 2nd October 2012 U.S. and Canadian ratings were based on (1) a stock’s absolute total return potential to its current share price and (2) the relative attractiveness of a stock’s total return potential within an analyst’s coverage universe. For Australian and New Zealand stocks, the expected total return (ETR) calculation includes 12-month rolling dividend yield. An Outperform rating is assigned where an ETR is greater than or equal to 7.5%; Underperform where an ETR less than or equal to 5%. A Neutral may be assigned
Aggreko (AGGK.L) 19 20 October 2016 where the ETR is between -5% and 15%. The overlapping rating range allows analysts to assign a rating that puts ETR in the context of associated risks. Prior to 18 May 2015, ETR ranges for Outperform and Underperform ratings did not overlap with Neutral thresholds between 15% and 7.5%, which was in operation from 7 July 2011. Restricted (R) : In certain circumstances, Credit Suisse policy and/or applicable law and regulations preclude certain types of communications, including an investment recommendation, during the course of Credit Suisse's engagement in an investment banking transaction and in certain other circumstances. Not Rated (NR) : Credit Suisse Equity Research does not have an investment rating or view on the stock or any other securities related to the company at this time. Not Covered (NC) : Credit Suisse Equity Research does not provide ongoing coverage of the company or offer an investment rating or investment view on the equity security of the company or related products. Volatility Indicator [V] : A stock is defined as volatile if the stock price has moved up or down by 20% or more in a month in at least 8 of the past 24 months or the analyst expects significant volatility going forward. Analysts’ sector weightings are distinct from analysts’ stock ratings and are based on the analyst’s expectations for the fundamentals and/or valuation of the sector* relative to the group’s historic fundamentals and/or valuation: Overweight : The analyst’s expectation for the sector’s fundamentals and/or valuation is favorable over the next 12 months. Market Weight : The analyst’s expectation for the sector’s fundamentals and/or valuation is neutral over the next 12 months. Underweight : The analyst’s expectation for the sector’s fundamentals and/or valuation is cautious over the next 12 months. *An analyst’s coverage sector consists of all companies covered by the analyst within the relevant sector. An analyst may cover multiple sectors. Credit Suisse's distribution of stock ratings (and banking clients) is:
Global Ratings Distribution Rating Versus universe (%) Of which banking clients (%) Outperform/Buy* 53% (55% banking clients) Neutral/Hold* 29% (24% banking clients) Underperform/Sell* 18% (44% banking clients) Restricted 0% *For purposes of the NYSE and NASD ratings distribution disclosure requirements, our stock ratings of Outperform, Neutral, and Underperform most closely correspond to Buy, Hold, and Sell, respectively; however, the meanings are not the same, as our stock ratings are determined on a relative basis. (Please refer to definitions above.) An investor's decision to buy or sell a security should be based on investment objectives, current holdings, and other individual factors. Credit Suisse’s policy is to update research reports as it deems appropriate, based on developments with the subject company, the sector or the market that may have a material impact on the research views or opinions stated herein. Credit Suisse's policy is only to publish investment research that is impartial, independent, clear, fair and not misleading. For more detail please refer to Credit Suisse's Policies for Managing Conflicts of Interest in connection with Investment Research: http://www.csfb.com/research-and- analytics/disclaimer/managing_conflicts_disclaimer.html Credit Suisse does not provide any tax advice. Any statement herein regarding any US federal tax is not intended or written to be used, and cannot be used, by any taxpayer for the purposes of avoiding any penalties.
Target Price and Rating Valuation Methodology and Risks: (12 months) for Aggreko (AGGK.L) Method: Our 740p price target is based 50% DCF/50% EV/IC-based SoTP. EV/IC-based sum-of-the-parts assumptions: Rental Solutions - WACC 6.5%/sustainable growth 3%; Industrial Power Solutions - WACC 8.5%/sustainable growth 4%; Utility Power Solutions - WACC 9.0%/sustainable growth 2.0%. We use the average of our discounted 2016E-18E implied valuations to set the EV/IC component of the target price. DCF assumptions: RFR 2.0%; ERP 6.5%; Beta 1.1x; terminal growth of 2.0%. Our Underperform rating for Aggreko reflects the material downside risk to the shares implied by our target price driven by significant concerns about growing competition. Risk: Upside risks to our 740p price target and rating include: Increased fleet capex guidance on cyclical improvement in end-markets, significant spikes in short term activity (including weather related and major events), consolidation, lower-than-projected roll out of distributed generation capacity in Utility markets, higher than projected rental market penetration and less successful progress made by competitors. Downside risks to our 740p price target and rating include: Slower real GDP growth, heightened competition, faster uptake of distributed generation capacity and lower than projected rental market penetration.
Please refer to the firm's disclosure website at https://rave.credit-suisse.com/disclosures for the definitions of abbreviations typically used in the target price method and risk sections. See the Companies Mentioned section for full company names The subject company (AGGK.L, CAT.N) currently is, or was during the 12-month period preceding the date of distribution of this report, a client of Credit Suisse. Credit Suisse expects to receive or intends to seek investment banking related compensation from the subject company (AGGK.L, CAT.N) within the next 3 months. As of the date of this report, Credit Suisse makes a market in the following subject companies (CAT.N).
Aggreko (AGGK.L) 20 20 October 2016
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Aggreko (AGGK.L) 21 20 October 2016
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