Ashtead, the equipment hire specialist, has announced stronger than expected first half results and increased its full year guidance. Group revenue increased 28% to £1,267m and underlying profit before tax rose to a record £343m, up 21% at constant exchange rates. The interim dividend rises by 33% to 4.0p per share. The shares were 7% higher in early morning trading.
First half highlights
- Sunbelt's (US business) total revenue increased 23% to $1,685m. A-Plant (UK) delivered rental only revenue of £131m, up 9% on the prior year.
- Capital expenditure was £696m, up 18% on the prior year. Full year guidance raised from £1bn to c. £1.1bn, reflecting strong demand in the USA.
- Net debt to EBITDA reduced to 1.9 times (2014: 2.0 times) on a constant currency basis.
The group commented
"With both divisions performing well, strong end markets and our strategy clearly working, we now anticipate a full year result ahead of our previous expectations and the Board looks forward to the medium term with confidence."
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 3.9x prospective book value.
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