Forge powers down outlook

Forge warns that it is struggling with two key power plant contracts and is preparing a revised outlook for the market. Management has requested a trading halt up to Wednesday.

Just when you thought the worst was over for the mining services sector, Forge Group (FGE) calls for a trading halt as it prepares to release what is likely to be distressing news for shareholders.

The engineering contractor has identified “concerns” about the potential underperformance of the Diamantina power station and West Angelas power station projects, which are worth around $570 million in revenue to the group.

Diamantina is one of the largest power projects that Forge has undertaken and both contracts could make up as much as a quarter of its $1.8 billion order book.

Shareholders will be waiting anxiously to learn about the financial impact of the news, but writedowns seem inevitable as the projects were acquired as part of Forge’s takeover of CTEC in January 2012.

Forge paid $16 million upfront with a further $22.6 million in earn-outs (payments tied to financial performance of the acquired entity). It is not clear how much of the earn-outs have been paid and whether any of that is recoverable.

Eureka Report warned that Forge could issue downbeat news during this annual general meeting season, but the underperformance of two key contracts in the power division (which constitutes 50% of group revenue) is shocking given management’s good track record.

Forge, which is part of the Uncapped 100, has fallen 15.2% since the start of the year and the stock closed at $4.18 on Friday. The stock could start trading again on Wednesday.