More losses at Forge
Recommendation
Forge Group has confirmed a further $23-28m of losses at troubled power plant contracts, taking total losses to $150m at the West Angelas and the Diamantina power stations. The company was cagey on the analyst conference call, refusing to take questions publicly, but there was palpable relief that losses were confined to these two projects. Thankfully Forge will bid for no further work in the power sector.
Further engineering work will require up to $19m in cash, a sum that ANZ’s generous working capital facility will finance. For an option on 13% of the business, ANZ has waived debt covenants, postponed principle repayments and is providing additional cash to Forge, but an equity raising at some point is still possible. That a major bank is willing to stand behind the company, and has no doubt inspected contracts in some detail, should be a comfort to shareholders.
Management confirmed it had cut costs and Forge maintains an order book worth $1.5bn, $600m of which is due from projects this year. An awful lot now rests of the success of the Roy Hill project, a giant iron ore development in Western Australia that accounts for the bulk of this year’s revenue. Any cost problems or delays could prove fatal for Forge. This is indeed a fragile business, as we noted in Risk, uncertainty and Forge on 7 Jan 14 (Avoid – $1.37). The share price has fallen 20% since then and our recommendation remains unchanged. AVOID.