Ashtead's rate of profit growth slowed slightly in the third quarter. Although, underlying rental revenues rose 19% in the quarter to £1bn, with operating profits up 21% to £297m.
The shares fell 2.3% in early trading.
Equipment rental is a fragmented industry, and Ashtead is investing to seize market share. That's sensible in our view, especially combined with a robust operating performance.
The group's 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 a trend for firms to rent rather than buy construction equipment are all providing tailwinds.
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 net debt to EBITDA creeping up towards the top end of the target range.
Higher leverage is a particular problem since a construction downturn would hit earnings far quicker than Ashtead can pay down debt. With the current 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 3.3 times, some way above its longer run average of 2.7. Analysts are forecasting a prospective yield of 2.1% next 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.
Third Quarter Results
Ashtead said its North American end markets remain supportive, and it expects those conditions to continue.
The US Sunbelt business saw revenue rise 21.9% in the first nine months of the year to £2.9bn, while the smaller Sunbelt Canada business increased revenues by 57% to £150m thanks to two large acquisitions.
In the UK, A-Plant delivered a more modest 1.8% revenue growth to £360.4m. Operating profits across the three divisions were £928.2m, £27.7m and £54.7m respectively.
Growth in the US was primarily driven by organic growth, with equipment utilisation unchanged at 73%. In the UK, growth was driven by increased fleet on rent - with pricing remaining competitive.
Capital expenditure in the first nine months of the year rose 49% to £1.1bn (net of money from the sale of older equipment). As a result, the group's fleet now has an estimated cost of £8bn, and an average age of 32 months.
Ashtead made 19 bolt-on acquisitions during the period for a total of £491m. An additional £104m has been invested in three acquisitions since the period end. Full year Capital Expenditure is expected to be towards the upper end of the group's £1.6bn guidance.
The group finished the quarter with a net debt to EBITDA (earnings before interest, tax, depreciation and amortisation) ratio of 1.8 times - within its target of 1.5-2 times, but ahead of the 1.6 times reported this time last year. That reflects increased capital investment and £327m in share buybacks.
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