The Investment Column: Power-hungry world allows Aggreko to put in stellar performance

Dignity; Coda
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The Independent Online

Our view: Buy

Current price: 541.5p (-8.5p)

Across the globe, the use of electronic appliances is fuelling a boom in demand for power, but many countries do not have the infrastructure capable of matching supply with demand. That is where Aggreko steps in by providing temporary power, and the stellar returns that shareholders have enjoyed over the past few years look set to continue after another forecast-busting set of first-half results.

Despite a strong currency headwind, interim pre-tax profit was up more than 60 per cent to £40.7m as the company benefited from strong demand all locations. Revenues soared 42.8 per cent to £317.5m, and would have been £15.6m higher but for the weaker US dollar.

The numbers were boosted by a first contribution from GE Energy Rentals, acquired last year for just over $200m. That is beginning to look like a bargain, particularly as the integration is going so well that Aggreko has even cuts its integration cost estimates, with more GE Energy Rentals staff able to get jobs within the rest of GE.

Aggreko believes full-year results will be "well ahead" of market forecasts, and it is easy to see why it is so confident. The company is running at almost full capacity and the only possible downside is that it will need to spend upwards of £200m this year on new equipment. But with virtually every global location delivering growth of at least 25 per cent, and the company operates in 90 countries, it is a nice problem to have.

The investment case for this stock is straightforward, particularly in emerging markets – demand for power is outstripping supply and will continue to do so. In developed markets, demand for temporary power is also growing fast, thanks to weather conditions and major outdoor events, such as the 2008 Beijing Olympic Games, where Aggreko is the exclusive sponsor of temporary power.

Aggreko is in excellent shape, and although the shares are not cheap, trading on almost 19.5 times forecast 2008 earnings, that number is bound to come down as analysts upgrade their estimates. Given the strength of these results, there should be at least 10 per cent added to forecasts. Buy.


Our view: Hold

Current price: 725p (+10p)

Apparently death and taxes are the only two certainties in life, and although there isn't much scope for investing in taxes there is a way of putting your money into death. Dignity is the only quoted funeral services provider in the UK, and its shares have shown plenty of life over the past three years – up 220 per cent since listing in April 2004.

Yesterday's interim results showed more progress as pre-tax profit for the first half rose by 6.4 per cent to £18.3m on a 3.6 per cent rise in revenue to £81.1m. The company expects to report full-year results in line with expectations.

Despite another encouraging set of numbers investors must be wondering if the stock, once billed as a utility with growth, is now just a utility. Growth is slowing, and the company has acquired another 21 locations in the first half, which will result in a significantly higher capital spend of £16.5m.

Rotherham council is expected to become the first local authority to outsource its crematorium and cemetery services and Dignity is the preferred bidder. There could be another five council contracts up for grabs in the short term, which Dignity will expect to compete for. However, the Rotherham contract does not begin until the middle of next year, so analysts will be loath to up forecasts until the first contract is awarded.

Thanks to the spectacular run the stock has been on since it listed, the shares now trade on over 20 times forecast 2008 earnings. There is still much promise in this business, and unless the elixir of life is discovered any time soon, its earnings look as defensive as it is possible to get. But 20 times earnings is a rich valuation on the back of these numbers and taking into account the £275m of debt on the balance sheet. Hold.


Our view: Buy

Current price: 184.5p (-2.75p)

In what could be called an Æsop's Fable, Coda's interim results cleaned up an overhanging issue that had worried analysts and depressed the share price for some time. The company's Executive Share Ownership Plan – or ESOP – was due to unwind in December, which would have resulted in 4.3m shares – 6 per cent of its issued share capital – being released on to the market. Instead, Coda has decided to rollover the plan, alleviating those concerns.

Perhaps more importantly, Coda – which develops financial accounting software – has made progress with Neon, the new version of its financials product. Many of the company's clients have started testing the product, and Coda has signed up Avis Europe as a new client.

With sales up 8 per cent and net cash very strong during the first half, the only concern for investors looking at Coda is the valuation. It sits on a valuation of around 17.5 times, which is at a premium to its peer group. Yet with upside to around 200p, or 219p on some estimates, Coda looks a good bet for investors. Buy.