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Ashtead - Revenue, profits and investment continue to climb

Nicholas Hyett | 18 June 2019 | A A A
Ashtead - Revenue, profits and investment continue to climb

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Ashtead Group plc Ordinary 10p

Sell: 4,619.00 | Buy: 4,623.00 | Change -10.00 (-0.22%)
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Underlying revenues rose 18% in the year to £4.1bn, with good organic growth boosted by bolt on deals in the US and Canada. Underlying operating profit rose 21% to £1.3bn.

The group announced a final dividend of 33.5p, with the total 2018/19 dividend up 21% year-on-year. Ashtead also spent £675m on share buybacks, with earnings per share up 33% to 174.2p as a result, and expects to spend a minimum of £500m buying back shares in 2019/20.

The shares rose 1.3% in early trading.

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Our view

Ashtead rents out construction equipment. It's a fragmented industry, and the group's 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 its 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 gradual creep of receivables, money Ashtead's earnt but not yet been paid, is another trend we'll be keeping a close eye on. It's not a major concern, but promises of payment aren't as reassuring a cash in the bank - and if a downturn hits Ashtead will need the cash on hand.

For now, the favourable economic environment means the shares trade on a price to book ratio of 3.8 times, some way above their longer run average of 2.2. Analysts are forecasting a prospective yield of 2.1% next year.

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

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Full Year Results

The US Sunbelt business saw revenues rise 20.1% to $5bn, or £3.8bn. The group added 123 new stores in the region, helping to boost the amount of fleet on rent, with pricing broadly unchanged. Average utilisation fell slightly to 71%. Despite the cost associated with new openings the division reported operating profits of $1.5bn, up 19%.

In the UK, A-Plant saw revenues rise 1% to £475m, supported by an increase in fleet on rent and a slight improvement in pricing. Operating profits fell 11.4% to £62m as competition in the UK remains tough.

The Canadian business was transformed this year by the acquisitions of CRS and Voisin - tripling the size of the business. Excluding this effect, revenue rose 18%, with total revenue of C$344m or £200.2m. Operating profits reached C$55m, with margins expected to settle around 20% in the near term.

Capital expenditure during the year hit £1.6bn, or £1.4bn once the sales of old equipment is taken into account. The fleet's cost at the end of the financial year stood at £8.3bn, with an average age of 34 months. The group invested a further £622m on 24 bolt-on deals during the year. Capital spending is expected to be similar next year.

Increased capital expenditure, continued acquisitions and the share buyback programme meant net debt rose 38.1% to £3.7bn at the year end. Net debt to EBITDA (earnings before interest, tax, depreciation and amortisation) rose to 1.8 times (2018: 1.6) - within the target 1.5-2 times range.

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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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