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Ashtead - Solid growth as US construction booms

Nicholas Hyett | 19 June 2018 | A A A
Ashtead - Solid growth as US construction booms

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Ashtead Group plc Ordinary 10p

Sell: 4,531.00 | Buy: 4,533.00 | Change -64.00 (-1.39%)
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Construction equipment rental specialist Ashtead saw revenues jump 20% last year, with rental revenue up 21% to £3.4bn. That supported a 21% increase in profit before tax, hitting £927m.

The group announced a final dividend of 27.5p, taking the full year payment to 33p per share - 20% ahead of last year.

But these results were a touch behind expectations - partly due to a weaker result from the UK - sending the shares down 6.1% 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. A construction boom 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.

But 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 reduced if needed, giving the group added flexibility.

So far the group's 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.

The favourable economic environment means the shares currently trade on a price to earnings ratio of 14.5 times , slightly above its longer run average of 14.1. Analysts are forecasting a prospective yield of just 1.6% this year.

Overall Ashtead is a bit of a balancing act at the moment - with the need to fund growth on one hand and keep the balance sheet healthy on the other. Management are rightly looking to make hay when the sun shines, but investors should make sure they fix the roof as well.

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Full Year Results

Ashtead's US business, Sunbelt, saw revenues rise 18% in dollar terms, with operating profits up 20% to $1.3bn. That was driven largely by the increase in equipment on rent, with prices broadly unchanged. The division also benefitted from reconstruction works following hurricanes Harvey, Irma and Maria - adding about $100m to revenue.

Sunbelt Canada, which more than doubled in size following the acquisition of CRS, saw revenues rise 20% on an underlying basis to C$233m. Operating profits in the division reached C$28.4m.

An increase in equipment on rent in the UK A-Plant business was partially offset by lower pricing. That reflects a combination of product mix and rate pressure in a competitive UK market - although revenues still rose 13%.

Ashtead finished the year with net debt of £2.7bn (2017: £2.5bn), although healthy profits growth means the group's net debt to EBITDA (earnings before interest, tax, depreciation and amortisation) ratio actually fell slightly from 1.7 times in 2017 to 1.6 times.

The group spent £706m on new rental equipment during the year (not including replacement of existing equipment) - with total capital expenditure of £1.2bn. The group also completed £392m of bolt on acquisitions during the year. Management expect to spend a similar amount next year.

Commenting on the outlook CEO Geoff Drabble said "with all divisions performing well and a strong balance sheet to support our plans, the Board continues to look to the medium term with confidence."

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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. 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.


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