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Ashtead - Investing for growth

Nicholas Hyett | 13 June 2017 | A A A
Ashtead - Investing for growth

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Ashtead Group plc Ordinary 10p

Sell: 5,110.00 | Buy: 5,112.00 | Change -12.00 (-0.23%)
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Revenues at construction equipment lessor Ashtead rose 11% in the final quarter to £717.4m, helping to generate operating profits of £216.6m. Full year rental revenues rose by 13% at constant exchange rates (CER) to £2.3bn, with operating profits up 7%.

The board has announced a final dividend of 22.75p per share, taking the full year payment to 27.5p, a 22% increase on the prior year.

The shares were broadly flat following the announcement.

Our View

With almost 90% of revenue generated in the US, weaker sterling and the prospect of increased infrastructure spending under Donald Trump reinforced a stellar performance at the end of last year.

The shares have come off the boil a bit since, following concerns that the embattled US administration won't be able to deliver the spending splurge it initially planned. But Ashtead management remains upbeat, and continue to invest for growth.

The group is targeting double-digit revenue growth through to 2021 and is supporting that with investment in organic growth, acquisitions and new store openings. Already Ashtead is befitting from a strong economic recovery in the US, along with a trend for US firms to rent rather than buy construction equipment.

Equipment rental is a fragmented industry, and investing to seize market share seems like a sensible move. However, the markets Ashtead services are notoriously cyclical and in the past the group hasn't been very good at managing that. Ashtead went into the financial crisis laden with debt after splashing $1 billion on acquiring another US rental firm just before the crash. When construction markets dried up, the share price fell by more than 85%.

We will be keeping a sharp eye on debt in the years ahead, but at the moment the group seems to be exercising a sensible degree of caution. Assuming replacement capex remains low, the group should generate significant free cash flow over the next few years.

At present Ashtead is prioritising reinvestment of that cash over returning it to shareholders. Still, with the dividend up 22% this year, it's unlikely shareholders will be feeling too neglected. Analysts are forecasting a prospective yield of 1.8% for 2017/18.

However, it's also worth noting that on a price to book basis (a more conservative method of valuing capital-intensive industries) the shares trade on multiple of 5.6 times - well above the long term average of 4.1 times book value .

Full Year Results

The US (Sunbelt) and UK (A-Plant) divisions both reported robust full year total revenue growth, up 27% and 15% to £2.8bn and £418m respectively. Operating profits from the two divisions were £840.9m and £71.6m.

Growth in Sunbelt combined organic same store growth, with average fleet on rent for the year hitting 71%, bolt-on acquisitions and new store openings. A-Plant also benefitted from an increase in fleet on rent, although there has been some weakness in pricing in Sunbelt's North American business.

Total revenue was negatively affected by lower used equipment sales, reflecting lower replacement capital expenditure. Average fleet age is now 29 months (2015/16: 25 months).

2016/17 saw margins stall slightly, reflecting drag from new openings, including 73 new stores in North America. However, cash generation has improved significantly, with free cash flow of £319m (2015/16: -£68m).

Total capital expenditure for the year was £917m (net of disposal proceeds), with 15 bolt-on acquisitions worth £437m. The group expects a similar level of capital expenditure in 2017/18. Net debt currently stands at £2.5bn, up c. £500m on last year. Net debt to EBITDA (earnings before interest, tax, depreciation and amortisation) remains unchanged at 1.7 times, in the middle of the group's 1.5-2 times target range.

Current conditions remain good and Spring has reportedly seen a good seasonal uplift in fleet on rent, together with record levels of physical utilisation for this time of year.

Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Thomson Reuters. These estimates are not a reliable indicator of future performance. Yields are variable and not guaranteed. Investments rise and fall in value so investors could make a loss.

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.