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Ashtead - Positive momentum across the business

George Salmon | 12 September 2017 | A A A
Ashtead - Positive momentum across the business

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Ashtead Group plc Ordinary 10p

Sell: 2,384.00 | Buy: 2,386.00 | Change 10.00 (0.42%)
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At constant exchange rates, first quarter rental revenue rose 17%, helping the group generate operating profit of £266.5m, up 20% on last year.

Ashtead says both its businesses have positive momentum, and it retains a confident near-term outlook. In addition, while it is still too early to quantify the impact of recent hurricanes in the US, the group says it's expecting to see an increase in demand. The shares rose 4.3% on the news.

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.

Ashtead is targeting double-digit revenue growth through to 2021, via organic growth, acquisitions and new store openings. The economic recovery in the US, and a trend for firms to rent rather than buy construction equipment are already helping, while the Trump spending splurge and post-Hurricane clean-up operations in Texas and Florida have the potential to provide support too.

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% last year, it's unlikely shareholders will be feeling too neglected. Analysts are forecasting a prospective yield of 1.74% for 2017/18.

On a forward price to book basis (a more conservative method of valuing capital-intensive industries) the shares trade on multiple of 3.2 times - well above the long term average of 2.3 times.

First quarter results

Rental revenues at the US-based Sunbelt business rose 17% to $745m, with 9% of this growth from same-store sales and 8% from Bolt-ons and Greenfield sites. A further 20 new stores were added in North America in the quarter.

Sunbelt's total Q1 operating profit rose 18.9% to $319.7m. Following the fall in the value of the pound, this equates to a 28.7% increase in sterling terms.

The UK A-Plant business also delivered strong growth. Total revenue rose 23.2% to £118.8m, with operating profits rising 27.3% to £22.4m.

In the quarter, Ashtead spent £377m on capital expenditure and £116m on bolt-on acquisitions. This extra spending means that despite generating £51m of free cash flow (versus a £46m outflow in Q1'16), net debt rose slightly in the quarter to £2.6bn. The ratio of net debt to EBITDA was 1.7 times, in the middle of the group's 1.5-2 times target.

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 disclosure for more information.