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Ashtead - good results, but a demanding valuation

Nicholas Hyett, Equity Analyst | 2 March 2021 | A A A
Ashtead - good results, but a demanding valuation

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Ashtead Group plc Ordinary 10p

Sell: 5,606.00 | Buy: 5,610.00 | Change -128.00 (-2.23%)
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Ashtead reported third quarter rental revenues of £1.1bn, down 1% year-on-year and slightly better than the first half and ahead of the wider market. Operating profits fell 11% to £257m, reflecting lower revenue and a modest rise in operating cost.

Full year results are now expected to come in ahead of management's previous expectations.

The shares fell 2.5% in early trading.

View the latest Ashtead share price and how to deal

Our view

Ashtead has weathered the pandemic far better than we had expected.

The company rents out construction equipment. Construction in general is a cyclical business that booms and busts along with the wider economy, and historically Ashtead's fortunes have followed suit.

Rental revenue has indeed fallen over the pandemic, 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. It also helps that recently the group has diversified into areas other than construction, which have actually seen revenue rise 10% so far this financial year.

With rental revenue stabilising and the group posting record free cash flow, Ashtead looks like it will be able to weather the immediate lockdown fall-out. Net debt is 20% lower than it was a year ago - thanks to the suspension of the share buyback scheme and a dramatic fall in capital expenditure.

The key issue now is what the future holds beyond the pandemic. The shares are trading on a price/book ratio of 6.1 - the highest it's been in over 20 years. That valuation requires rapid recovery and strong future growth. We suspect that's predicated on massive fiscal stimulus, particularly in the US, sparking a surge in rental demand. However, some caution is still warranted in our view. If the construction sector doesn't bounce back as quickly as hoped, that would hit both fleet utilisation and rates - creating a longer term drag on revenues. At the current valuation that would hit the share price hard.

Longer term we take comfort in the fact that Ashtead has access to significant liquidity, 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. Despite the impressive resilience, investors should make sure they're in for the long haul and prepared for some potentially disappointing results in the short to medium term.

Ashtead Group key facts

  • Price/Earnings ratio: 23.7
  • 10 year average Price/Earnings ratio: 14.8
  • Prospective dividend yield (next 12 months): 1.1%

All ratios are sourced from Refinitiv. Please remember yields are variable and not a reliable indicator of future income. Keep in mind key figures shouldn't be looked at on their own - it's important to understand the big picture.

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Third Quarter Results

Revenue for the first nine months of the year fell 4.3% to £3.8bn (down 2% at constant exchange rates). A 5.4% decline in rental revenue, to £3.4bn, was partially offset by a modest increase in the sale of new equipment. Underlying operating profit across the thirst nine months fell 17.6% to £917.7.

Activity levels have increased throughout the period, with fleet on rent now in line with the prior year in the US, slightly behind in Canada and ahead in the UK.

In the US total revenue year-to-date of $4.0bn was down 5.7% on last year, with operating profits down 17.5% to $1.1bn

In Canada revenues rose 11.2% to C$356.6m, boosted by recent acquisitions. Operating profits rose 10.9% to C$63.9m.

In the UK revenues rose 21.6% to £444.1m, with operating profits up 2.6% to £38.8m. This reflected work completed for the Department of Health, which accounted for 25% of all UK revenue.

Capital expenditure across the nine months was £518m, down from £1.3bn last year. However, full year capital expenditure is now expected to be at the upper end of previous guidance, at around £700m, with 2021/22 capital expenditure of £1.3bn-£1.5bn.

Free cash flow across the first nine months of the year was $1.1bn, a record for the business thanks to the decline in capital expenditure. The cash was used to reduce debt, with net debt falling to £4.3bn from £5.4bn a year ago, equivalent to 2.1 times cash profits.

Management now expect rental growth to come in towards the top end of previous guidance, falling 4% for the year as a whole. Free cash flow for the year is expected to be around £1.2bn.

Find out more about Ashtead including how to invest

This article is original Hargreaves Lansdown content, published by Hargreaves Lansdown. Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Refinitiv. 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.