Ashtead, the equipment-hire specialist, has announced first quarter results which show momentum in its markets continuing. Underlying rental revenue and operating profit increased by 20% and 25%, respectively, at constant currency. Sunbelt, the group's US operation, which accounts for around 85% of sales, was particularly strong with revenue up 29%. A-plant (UK) also performed well with revenue growing by 11%.
The shares have been weak performers over the last 3 months or so, with investors worried that weaker energy prices could translate to a wider downturn in US non-residential construction spending. There is little sign of this yet, which has seen the shares rise by around 4% in early morning trading.
- Same-store growth of 13% compared to 7% growth for its markets. Bolt-on acquisitions and greenfield site openings added another 10% to revenue.
- Total rental-only revenue growth was 23% with average three month physical utilisation in line with last year at 72%.
- Capital expenditure (capex) was £349m. The group continues to expect full year capex of c.£1bn.
- Return on investment (RoI) of 19%, in line with last year.
- Net debt to EBITDA fell slightly to 1.8 times (2014: 1.9 times).
Ashtead provides rental equipment to the notoriously volatile US construction markets and is a very capital intensive business. In the good times it spends large sums on its fleet of equipment, so it invariably has very little cash on the balance sheet and debt tends to be on the high side. The model works fine in the good times, but when conditions take a turn for the worse, you're left with a load of equipment no one wants; and, potentially an overstretched balance sheet.
Ashtead went into the financial crisis laden with debt after splashing $1 billion acquiring another US rental firm just before the crash. When construction markets dried up the share price fell by more than 85%, so Ashtead has a history of volatility that should not be forgotten.
But Ashtead survived and is now thriving again. Economic conditions in the US and UK remain favourable and the trend for US firms to rent rather than buy construction equipment shows no sign of slowing down. Ashtead is also less leveraged than it was at the end of the last economic cycle.
When all is well, the market tends to look at Price to Earnings (P/E) measures, for stocks like Ashtead, but in the downturns, Price to Book Value (P/BV) has tended to be a better guide, because Book Value is less volatile than earnings per share. Over the last ten years or so, Ashtead has traded at an average P/BV ratio of 2.4x, with a high earlier this year of over 5x and a crisis-era low value of under 0.5x. Today the stock is rated at 3.4x prospective book value.
Commenting on the outlook, the group said:
"With both divisions performing well, strong end markets and our strategy clearly working, we expect full year results to be in line with our expectations and the Board looks forward to the medium term with confidence."
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