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Ashtead - Strong growth across all divisions

Nicholas Hyett | 6 March 2018 | A A A
Ashtead - Strong growth across all divisions

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Ashtead Group plc Ordinary 10p

Sell: 5,966.00 | Buy: 5,972.00 | Change 0.00 (0.00%)
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Construction equipment lessor Ashtead continued to deliver rapid growth in the third quarter, with rental revenues up 24% to £845.5m. Operating profits for the quarter rose 23% to £233.3m.

Growth was driven by an increase in equipment on rent, with prices broadly flat on last year.

The shares fell 2.7% in early trading.

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Our View

Ashtead is targeting annual 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 providing tailwinds.

Equipment rental is a fragmented industry, and the group is investing to seize market share. That's sensible in our view, especially combined with a robust operating performance.

However, construction rental is also 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 $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.

With the US accounting for over 80% of revenues, the weak dollar is denting the group's outlook at the moment. As a result, the shares currently trade on a price to earnings ratio of 13.6 times, slightly below their longer run average of 14.3 However, if the last few years have taught us anything it's that currency movements are rarely predictable, and that it's operating performance that counts. On that front Ashtead is looking pretty sharp.

Analysts are forecasting a prospective yield of just 1.8% this year.

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Third Quarter Results

New stores and same store rental growth saw Sunbelt, Ashtead's US business, deliver 15% organic revenue growth over the first nine months of the year, with bolt-on deals adding 5%.

Year-to-date, Sunbelt has posted revenues of $3.1bn, equivalent to £2.4bn or 84% of the group total. Operating profit was £759.4m, 92% of group total.

The UK business, A-Plant, saw total revenue rise 17% to £354m and operating profits rise 12.7% to £56.8m.

Following the acquisition of CRS in August 2017, Sunbelt Canada has more than doubled in size, with revenue of £95.5m and operating profits of £19.7m. The underlying business continued to perform strongly with revenues up 16%.

Capital expenditure in the first nine months of the year hit £762m (net of proceeds from the sale of old equipment), with £315m spent on ten bolt-on deals so far this year. Full year capital expenditure is now expected to be at the top end of guidance, at around £1.2bn, with a similar amount next year.

Despite increased capital expenditure, free cash flow more than doubled to £179.4m (2017: £68.5m).

Net debt rose 1.5% to £2.6bn, but fell to 1.5 times earnings before interest, tax, depreciation and amortisation (2016: 1.8 times) thanks to currency movements and growth in profits.

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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.

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.