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Ashtead - Profits soar as revenues jump and taxes slump

Nicholas Hyett | 11 September 2018 | A A A
Ashtead - Profits soar as revenues jump and taxes slump

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Ashtead Group plc Ordinary 10p

Sell: 3,589.00 | Buy: 3,591.00 | Change 37.00 (1.04%)
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Ashtead reported a 19% uplift in rental revenue during the first quarter, hitting £961m. Underlying profit before tax rose 23% to £285.6m while lower taxes in the US and a share buyback programme meant earnings per share rose even faster, up 46% to 44.8p per share.

Management now expect full year profits to be ahead of previous expectations, and the buyback programme has been extended as a result.

The shares rose 3.9% 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 and tax cuts in the US, plus 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%.

So far the group's been exercising a sensible degree of caution on debt. However, it feels like it might be loosening the purse strings - with a chunky buyback and comments about operating towards the upper end of the net debt to EBITDA target range.

At the moment surging sales means leverage is actually falling, despite the debt taken on to fund that growth. But a construction downturn would hit earnings far quicker than Ashtead can pay down debt. With the boom fuelled by a Presidential administration that's erratic to say the least, we'd really rather debt stayed low for the time being.

The favourable economic environment means the shares currently trade on a price to book ratio of 4.4 times, way above its longer run average of 2.8. 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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First Quarter Results

Revenue growth was driven by strong results in the US (local currency growth of 20.6%) and acquisitions in Canada (local currency growth of 290%). With UK revenues growing just 5.7% the breakdown of revenue by region is now; US £877.4m (83.8%), UK £125.6m (12%), Canada £44.4m (4.2%).

Canada aside, revenue growth was largely organic, with an improvement in fleet on rent and prices. Average fleet utilisation remains unchanged.

At an operating profit level the US is even more dominant, accounting for 91.6% of total operating profit. That reflects an operating margin in the US of 51%, versus 38% in the UK.

Net debt at the end of the quarter was £3bn (2017: £2.6bn), although strong earnings growth meant that net debt to EBITDA (earnings before interest, tax depreciation and amortisation) actually fell to 1.6 times (2017: 1.7).

The increased level of debt reflects net capital expenditure of £415m, (2017: £354m) and bolt-on acquisitions of £145m (2017: £116m).

Ashtead's share buyback plan has been increased to £125m per quarter, from £100m, and has also been extended into 2019/20.

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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.