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Ashtead - Looking forwards with confidence

Nicholas Hyett | 7 September 2016 | A A A
Ashtead - Looking forwards with confidence

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Ashtead Group plc Ordinary 10p

Sell: 4,562.00 | Buy: 4,565.00 | Change -35.00 (-0.76%)
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Ashtead, the construction equipment rental company, rose more than 4% in early trading after releasing first quarter results. Group rental revenue rose 12% to £660.8m at constant exchange rates (CER), generating a pre-tax profit of £183.6m, up 4% at CER.

The group continued to deliver both same-store and bolt-on/greenfield growth, of 6% and 7% respectively. The US business, Sunbelt, increased revenues by 4% to $853.1m (£610.7m) with operating profits also up 4% to $268.9m (£192.4m). A-Plant, the UK business, grew revenues 7% to £96.4m, with operating profits up 3.5% to £17.6m.

The group has benefited from weaker sterling, boosting reported results by £17m, largely offset by lower gains on fleet disposals (£12m). Capital expenditure (capex) in the quarter was £328m and £310m net of disposals (Q115: £349m and £291m). Bolt on acquisitions of £64m contributed to 24 new stores in the quarter, more than half of which were in speciality locations.

Net debt to EBITDA reduced to 1.7 times (2015: 1.8x) on a CER basis, in the middle of the group's 1.5-2x target range.

The group continues to be upbeat on the future with CEO Geoff Drabble commenting: "Both divisions are performing well, our end markets are strong and with the benefit of weaker sterling, we expect full year results to be ahead of our expectations and the Board continues to look to the medium term with confidence."

Our view:

Ashtead has benefitted from a strong recovery in non-residential US construction spending since the financial crisis, along with a trend for US firms to rent rather than buy construction equipment which has driven significant market share gains. Although more recent data has suggests a slowdown in US construction spending, the company has been a significant beneficiary of weaker sterling and remains confident for now.

The markets Ashtead services are notoriously cyclical and in the past the group hasn't been very good at managing the cycle. 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%.

Ashtead's plans to cut back capex and reduce leverage suggest it may just have learned its lessons. Because Ashtead's cash requirements will be significantly reduced (and assuming market conditions remain favourable), it should generate significant free cash flow over the next few years to support dividends and earnings-enhancing share buybacks.

The shares have had a very strong run recently, up 59% since April , and now trade on a price to book of 4.3x - significantly above the long term average of 2.1x . The group's strategy seems sensible and should leave it in a better position to weather the next downturn while also returning increasing amounts of cash to shareholders. Analysts are forecasting a prospective yield of 1.9% in 2017 and 2.1% in 2018.

This article is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication. Non-independent research is not subject to FCA rules prohibiting dealing ahead of research, however HL has put controls in place (including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing. Please see our full non-independent research for more information.

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