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Ashtead - continued growth and spending

George Salmon | 10 September 2019 | A A A
Ashtead - continued growth and spending

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Ashtead Group plc Ordinary 10p

Sell: 2,306.00 | Buy: 2,307.00 | Change -31.00 (-1.33%)
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Ashtead's first quarter underlying revenue has risen 17%, to £1.3bn. However, profit growth lagged slightly as margins weakened in the UK. Underlying earnings per share rose 12% to 49.1p.

The shares dipped 1.7% on the news.

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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%.

It feels like it might be loosening the purse strings again - with a chunky buyback and the ratio of net debt to cash profits (EBITDA) creeping up.

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 as 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 10 year average of 3.1. Analysts are forecasting a prospective yield of 2% 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 they should be careful not to leave the group too exposed as and when conditions turn.

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First quarter results - to ease comparisons, the below figures exclude the impact of IFRS accounting changes

Rental revenue increased 16% to £1.2bn, driven by US rentals rising 18% to $1bn. That organic growth was augmented by $53m of revenue from bolt-on acquisitions made since May 2018. With Ancillary revenue and old equipment sales also rising strongly, total US revenues rose 18% to $1.4bn.

Revenue trends in Canada were also strong, up 23.3% to C$94.8m. However, competition in the UK saw A -Plant rental revenues fall 1% to £94m, although total revenue still rose 5% to £131m reflecting higher used equipment sales.

An acquisition spend of £205m, a gross capital spend of £521m and £125m of share buybacks helped the group's net debt position swell from £3bn to £5.2bn, although £1.2bn of the increase was down to currency movements and a change in accounting rules. On an underlying level, leverage as measured by net debt to cash profits (EBITDA) rose from 1.6 to 1.8 - although still within the target range of between 1.5 and 2.

Looking ahead the group said it 'continues to perform well in supportive end markets' and 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 disclosure for more information.