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Ashtead - UK remains tough

Nicholas Hyett | 10 December 2019 | A A A
Ashtead - UK remains tough

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Ashtead Group plc Ordinary 10p

Sell: 2,908.00 | Buy: 2,910.00 | Change 0.00 (0.00%)
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Underlying rental revenue rose 13% in the first half to £2.4bn, with earnings per share up 11% to 111.8p. Higher revenues reflects good growth in the US, with bolt on acquisitions also boosting performance. However, conditions in the UK remain tough, and management are taking action to refocus the division.

The interim dividend rose 10% to 7.15p.

The shares fell 5.8% 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 not unreasonable given the benign conditions across the pond, but it's not without its risks.

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 equipment 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, and the outlook for the UK looking increasingly rocky, 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 4 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 when conditions turn.

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First half results

The US business, Sunbelt, saw revenues rise 15.5% to $2.9bn (or £2.3bn). That reflects both organic growth and acquisitions, with Sunbelt adding 44 new stores in the half. The division delivered high levels of fleet on rent despite the lack of hurricane activity impacting demand compared to previous years. Profitability was similar to previous years, generating operating profits of $947m (£755.9m).

Sunbelt Canada saw revenue rise 19.7% to C$200.3m (or £120.6m), while operating profits rose 11.3% to C$40.4m (£24.3m). That reflects recent acquisitions, without which rental revenue would have risen 11%.

Revenue at A-Plant, Ashtead's UK business, rose 2.2% to £255.9m. However, increased competition hit rental rates and, combined with the sale of low returning equipment, meant profits slipped 32% to £30m.

Ashtead invested £231m in 11 bolt on acquisitions during the half, while capital expenditure fell slightly to £1bn. Three further acquisitions have been completed since the end of the half, although full year capital expenditure is now expected to be at the lower end of the 1.4bn-1.6bn guidance range.

Net debt rose 45% to £5.2bn, reflecting acquisitions, share buybacks and changes to accounting rules. Excluding the accounting changes net debt rose 17.4%.

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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.