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Ashtead - revenues lower but stable

Nicholas Hyett, Equity Analyst | 27 April 2020 | A A A
Ashtead - revenues lower but stable

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Ashtead Group plc Ordinary 10p

Sell: 2,395.00 | Buy: 2,398.00 | Change -79.00 (-3.20%)
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The majority of Ashtead's shops remain open, with stores designated as an essential business in the US, UK and Canada.

US rental revenues were 2% higher than last year in March, and down 15% in April. This reflects an 18% fall in general tool rentals, partly offset by a 9% increase in speciality rental.

Since 10 April the level of US fleet on rent has stabilised and shown modest improvement. With similar trends in the UK and Canada, the group now expects profits before tax for the year ending 30 April 2020 to be around £1.1bn, down 5.4% on last year.

The group has also taken substantial steps to preserve cash, including cutting capital expenditure by around 58%, pausing M&A activity and the share buyback programme,

Ashtead shares rose 5.0% in early trading.

View the latest Ashtead share price and how to deal

Our view

Ashtead rents out construction equipment. Construction in general is a cyclical business that tends to follow the booms and busts of the wider economy. Unsurprisingly Ashtead's fortunes tend to follow suit.

However, the group has weathered the early days of the current crisis rather well. Rental revenue has fallen, but thanks to Ashtead's essential business status its shops remain open. Increased demand from emergency services and key industries like utilities and telecoms has helped offset some of the reduced construction demand.

With rental revenue stabilising and the group modelling positive free cash flow even in some pretty tough conditions, Ashtead looks like it will be able to weather the immediate lockdown fall-out. It helps that management have taken some pretty drastic steps to preserve cash and boost liquidity.

The share buyback programme has been scrapped, after spending several hundred million at higher prices over the last year. Capital expenditure guidance for 2021 is way down and broadly in line with last year's replacement capex once you account for new additions. Growth is playing second fiddle to survival at the moment.

We have concerns about growth prospects once the immediate impact of the lockdowns is over too. An economic downturn looks increasingly inevitable and, while government spending on infrastructure will probably provide some cushion, it's unlikely construction will bounce back quickly. That would have negative effects for fleet utilisation and rates - creating a longer term drag on revenues.

We take comfort in the fact that Ashtead has access to significant liquidity, and longer term its competitive position in the fragmented equipment hire business is attractive. However, we're not sure the group's valuation necessarily reflects the near-term challenges.

At 3.1 times book value, the shares are trading below their long term average but at levels we've seen frequently in the last few years when conditions were far kinder. Investors should make sure they're in for the long haul and be prepared for some potentially disappointing results in the short to medium term.

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Guidance for capital expenditure in the coming year has been cut to £500m from £1.2-£1.3bn. M&A and share buyback programmes that together cost a little over £1bn last year have also been delayed.

The group has implemented a companywide freeze on new hires and also reduced discretionary and third party costs where possible. Ashtead has not made any staff redundant and currently does not intend to use the UK government's coronavirus Job Retention Scheme.

The group has $2.1bn of liquidity available, significantly above the $460m minimum availability requirement. Ashtead's modelling currently sees it remain free cash flow positive in all modelled scenarios, and well above the $460m threshold.

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