HSBC upgraded Aggreko to ‘buy’ from ‘hold’ and raised its target price to 1,050p from 740p.
Earlier this month the company said it was on track to meet full year earnings expectations despite a 7% decline in pre-tax profit to £59mln in the first half due to higher fuel costs.
Revenues increased 14% to £857mln, with the rental solutions business (up 32%) leading the way.
Aggreko said it was confident it can deliver a return on capital employed “in the mid-teens in 2020 with potential for further improvement beyond this”. The company is in the middle of a restructuring and plans cost cuts of £50mln to improve profitability in the medium term.
“We think that much of Aggreko’s woes are of a cyclical nature, rather than structural,” HSBC said.
“The supply chain is supportive of expecting such a recovery, bar the risks from a trade war led disruption. If we are right, growth will return.”
HSBC said it expects a late cyclical improvement in the underlying business.
“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,” HSBC said.
The bank said key risks include trade wars that may impair cyclical growth and receivables collection pace, along with contract churn, led by underinvestment.
Shares rose 4.9% to 884p in late morning trading.