Shares in APR Energy (LSE: APR) fell by more than 10% to a record low this morning, after the generator hire firm issued a profit warning. APR’s shares have now lost 70% of their value over the last 12 months.
APR’s management said today that 2014 profits would be “at the low end” of expectations and that “hesitancy among our prospective customers to make decisions” meant that 2015 growth would be limited.
What’s gone wrong?
APR flagged up a 45% increase in revenue this morning, and at first glance, it’s hard to understand why APR has fared so badly this year, given that full-year profits are expected to rise significantly.
However, a closer look reveals that APR is heavily dependent on its 450MW contract in Libya. This provides around 50% of the firm’s operating earnings, according to estimates by broker Morgan Stanley.
Libyan woes
APR agreed an extension for its 450MW Libyan contract in July, but said today it is still in the “final stages” of signing the associated contract addendum, even though the contract only runs until the first quarter of next year.
The firm also revealed that 100MW of the 450MW it supplies in Libya will now be offline until Q1 2015, due to the relocation of a generator. This means that the revenue associated with this generator will be deferred until next year, cutting 2014 earnings.
I believe that APR’s dependence on Libya is one reason why its share price has fallen so far this year: APR shares now trade on an unusually low 2014 forecast P/E of 6, whereas APR’s larger peer, Aggreko (LSE: AGK), trades on a forecast P/E of 18,
APR vs Aggreko
Aggreko’s share price has fallen by around 40% from its 2012 peak, which might suggest that Aggreko faces similar problems to APR. However, the larger firm’s income is far more diverse and I believe its outlook is more stable.
Despite this, I think Aggreko’s P/E of 18 is too high: the firm’s forecast earnings in 2014 and 2015 are expected to be lower than those reported each year since 2011.
Unless Aggreko surprises the market, I believe further falls are possible: frankly, I’d rather take a punt on low-rated APR than invest in Aggreko at today’s prices, although I believe there are far better buys than either company in today’s market.