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Ashtead - Momentum continues, share buyback announced

Nicholas Hyett | 12 December 2017 | A A A
Ashtead - Momentum continues, share buyback announced

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Ashtead Group plc Ordinary 10p

Sell: 6,114.00 | Buy: 6,118.00 | Change 26.00 (0.43%)
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Underlying rental revenue grew 22% in the second quarter, taking first half revenue to £1.8bn. Operating profits rose 21% over the half to £591m.

Shares rose 3.9% in early trading, with the group announcing an interim dividend of 5.5p, up 16%, and a £500m-£1bn share buyback to be delivered over the next 18 months.

Our View

Ashtead's targeting double-digit revenue growth through to 2021, with organic growth, acquisitions and bolt-on deals all playing a role. The economic recovery in the US, supported by hurricane reconstruction work, and a trend for firms to rent rather than buy construction equipment are already helping.

Equipment rental is a fragmented industry, and the group is investing to seize market share. That's sensible, especially combined with a robust operating performance. However, construction rental is also a notoriously cyclical industry, 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 $1bn on another US rental firm. When construction markets dried up, the share price fell by more than 85%.

That said, Ashtead should generate significant cash flows over the next few years. At the moment these are being spent on expansion, but that could be curtailed if necessary, giving the group added flexibility.

So far the group has been able to fund its expansion while exercising a sensible degree of caution on debt. However, it feels like it might be loosening the purse strings a bit - with a chunky buyback and comments about operating towards the upper end of the target leverage range. We'll be keeping an even sharper eye on debt from now on.

We also feel it's an odd time to launch a share buyback. The shares trade on a forward price to book ratio (a more conservative method of valuing capital-intensive industries) of 3.7 times - well above the long term average of 2.4 times.

Analysts are forecasting a prospective yield of just 1.5% this year.

Half Year Results

Ashtead's strong first half performance reflects a good underlying performance, boosted by clean-up efforts in the Southern US following hurricanes Harvey, Irma and Maria.

North America, and the US in particular, continues to account for the vast majority of revenues. Sunbelt US posted first half revenues of £1.6bn (up 20% and 84% of the group total).In the UK, A-plant saw growth of 23%, reaching £245.1m. Acquisitions saw Sunbelt Canada more than double revenues to £54m.

Overall group operating margin improved by 0.5 percentage points to 31.1%, driven by a strong performance in the US.

Ashtead continues to invest in growth, with capital expenditure of £708m - towards the upper end of management's expectations. As a result, full year capital expenditure is now expected to be in the region of £1.2-1.3bn. The group invested £298m in nine bolt-on acquisitions on the first half.

Net debt at the end of the half stood at £2.9bn (2016: £2.7bn), equating to 1.8 times EBITDA (earnings before interest, tax, depreciation and amortisation).

Although recent tailwinds are expected to subside in the second half, Ashtead now expects full year results to be ahead of prior expectations.

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.