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Ashtead - on track to meet full year expectations

Sophie Lund-Yates, Equity Analyst | 3 March 2020 | A A A
Ashtead - on track to meet full year expectations

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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 of £1.1bn rose 8% in the third quarter, excluding the impact of exchange rates and new accounting policies. Underlying cash profits (EBITDA) were up 10% at £584m, with the increases reflecting "supportive" North American end markets.

Ashtead expects full year results to be in line with expectations, despite lacklustre construction markets.

The shares were unmoved following the announcement.

View the latest Ashtead share price and how to deal

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, but it's not without its risks.

The group previously said it'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 shares trade on a price to book ratio of 3.1 times, broadly in line with the 10 year average. 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 keep 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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Third Quarter Results (underlying figures unless otherwise stated)

The US Sunbelt business saw rental revenue rise 5.8% to £960m which fed into overall revenue of £1.1bn, with operating profit before amortisation increasing 5.5% to £299.2m. The improvements reflect higher fleet on rent, and the impact of acquisitions. The smaller Sunbelt Canada business saw revenue rise 34.8% to £70.5m, reflecting acquisitions.

In the UK, A-Plant revenues fell slightly, reflecting lower sales of used equipment and a small increase in rental revenue. Operating profit before amortisation was down 26%, at £7.8m, as margins were impacted by the effect of increased fleet disposals. The UK market remains challenging, reflecting increased competition and uncertainty.

The average age of rental equipment now stands at 34 months.

Ashtead spent £407m on bolt-on acquisitions during the first three quarters of the year, and underlying net debt was £4.4bn, excluding the impact of exchange rates. That reflects a net debt to EBITDA ratio of 1.9 times, compared to 1.8 last year, and is in line with the group's target of 1.5 - 2.0 times.

Ashtead spent £376m on share buybacks in the first nine months of the year, in line with the £500m programme in place for the full year. A further £500m will be repurchased in 2020/2021.

The group continues to expect capital expenditure for the year at the lower end of previous guidance, at around £1.4bn. This will be around £1.1bn - £1.3bn in 2020/21, "which should result in mid to high single digit revenue growth in the US".

Find out more about Ashtead including how to invest

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.