Questor share tip: Follow Soros and sell APR Energy

APR Energy
£573.5p+54p
Questor says SELL

APR Energy [LON:APR], the temporary power company, today announced a strong second quarter of trading but Questor thinks investors are best out of the shares as George Soros and other professional investors cut their stakes.

Soros Fund Management slashed its investment from 11.1m share to 5.56m on April 14, and just a week later the Soros appointed board member handed in his resignation on April 22.

Professional investors have followed suit. The Capital Group, which was founded in the US in 1931 by Jonathan Bell Lovelace and is famously called “the largest investment fund nobody has ever heard of”, cut its holding by 75pc, from 4.7m shares on June 24, to less than 1.6m shares today.

There are other warning signs that have caught Questor's eye, Andrew Martinez the chief financial officer announced his resignation on June 5, and he will leave on September 1. That is less than two years after he took over the CFO duties from Rick Greene who announced his shock resignation in 2012 after the annual accounts for 2011 were delivered late.

Perhaps the fact that Soros Fund Management is making for the exit is no great shock. Soros was a founder investor providing initial capital for the business to expand before it listed, so a reduction of the stake was always on the cards as seed investors don't tend to hang around for the long term.

That said, Questor has noticed some other concerning trends. APR said that the utilisation of the fleet was 70pc at the end of June, and that is a sharp drop from the 81pc utilisation level reported three months earlier. The net debt level remains at $518m, as cash balances fell from $78m, to $58m.

The company rents out large gas turbines that generate electricity for customers whose infrastructure cannot cope. The units are effectively jet engines in a box, but instead of creating power for take-off, they generate electricity. The problem being that when they aren't on hire with customers they are incurring depreciation costs and generating no cash. APR said the fleet size increased 6pc to 2,194 megawatts at June 30.

The typical customer is a country where growth has outstripped the power grid or a natural disaster has destroyed capacity. APR has units in Indonesia, Senegal and recently signed its biggest contract to supply the war ravaged Libyan state with electricity. The deal with Libya to supply 450 megawatts (MW) of power, has now been extended to March 2015.

Given the size of these contracts and that they last for relatively short periods, the revenue for APR can be very lumpy. The power group reported pre-tax profits of $27.5m, on revenue of $308m to December 2013, reversing a pre-tax loss of $4.9m a year earlier.

Questor thinks this latest update for the second quarter ended June showed strong contract wins but the drop in utilisation could hurt profitability. Analysts from broker Investec trimmed full year pre-tax profit forecasts to $135.8m, from $137.6m, giving earnings per share of $1.13 (66p), was $1.15 (68p)

The shares may look like they offer value trading on about 8 times earnings and backed by assets, but Questor thinks this is a value trap. Those assets are worth a lot less if they are not on hire as is the case with about 30pc of the fleet at the end of June.

Questor advised selling APR Energy shares last year (£11.50, October 23, SELL). And nothing if not consistent Questor said APR Energy was "Priced to Fail" about three moneths before that (£10.06, August 29, SELL) We still think it would be wise to follow the professionals. Sell.