Ashtead reported fourth quarter revenue of £1.3bn, up 23% on last year at constant exchange rates. Full year revenue came in at $5.0bn, up 3% year-on-year. Full year operating profits fell 3% to £1.1bn, although lower interest and tax expenses meant underlying earnings per share fell just 1% to 166.0p.
The group proposed a final dividend of 35.0p, taking the full year total to 42.15p per share, up 3.7% year-on-year.
The shares were broadly flat in early trading.
Ashtead has weathered the pandemic far better than we had expected.
The company rents out construction equipment, particularly in the US, and construction in general is a cyclical business. It 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 13% this financial year.
However, the real area of success has been cash flow.
Despite lower operating profits, operating cash flow rose 49% last year. That reflects the decision to delay the replacement of existing rental equipment - with net capital expenditure falling by two thirds year-on-year.
Delaying capital expenditure is probably a strategy that works best during a short-sharp downturn - as we saw last year. And we're not sure it would be quite as effective over a sustained recession. Nonetheless, this gives Ashtead lots of financial flexibility, despite having a high proportion of inflexible operating costs. And it's this very strong free cash flow that has driven a 21.9% fall in net debt, putting the group in a very strong position going into the 2022 financial year.
With the amount of equipment on hire picking up as the year progressed, Ashtead looks well positioned to capitalise on a strong recovery from the pandemic. Governments are planning massive fiscal stimulus over the coming years, particularly in the US where planned infrastructure spending has barely begun. That would be good news for the wider construction industry and could spark a surge in rental demand.
The balance sheet means the group can invest to meet the extra demand - opening new stores, expanding its rental fleet and pursuing its strategy of bolt-on acquisitions, where appropriate. However, we do worry that the extra cash is burning a hole in the group's pockets.
A £1bn share buyback programme over the next 2 years comes while the shares are trading on their highest ever price-to-book ratio. Buying back expensive shares has been a common way to destroy shareholder value in the past - and we would really rather that cash was either deployed within the business or paid out as a special dividend.
Still, the combination of a positive outlook for the group's end markets and a rock-solid balance sheet means the company deserves to be riding high. A competitive position in the fragmented equipment hire business provides scope for long term growth. Nonetheless the sky-high valuation means 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: 27.3
- 10 year average Price/Earnings ratio: 14.7
- Prospective dividend yield (next 12 months): 0.9%
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.
Full Year Results (constant exchange rates)
Ashtead's US business, Sunbelt, reported full year revenues of $5.4bn, down 1.3% year-on-year, as rental revenue fell 2%, offset by a more modest decline in used equipment and consumable sales. That fed through to an operating profit of $1.4bn, down 7.4%. The division saw strong year-on-year growth in its Speciality business, up 13% year-on-year, which was offset by weakness in general tools.
In Canada revenues rose 19.1% to C$500.9m, supported by acquisitions. Profits came in at C$97.8m compared to C$54.5m a year ago. Excluding the effect of acquisitions, rental only revenue fell 2%.
UK revenues rose 35.4% to £635.1m, while operating profits rose 67.3% to £60.9m. Growth reflects the group's work supporting the Department of Health during the year - which accounted for 29% of all UK revenue during the year.
Staff costs declined modestly year-on-year, reflecting the company's commitment not to make any staff redundant due to the pandemic. An increase in other operating costs meant overall operating costs rose 1.9% to £2.7bn.
Capital expenditure came in at £718m, and £410m excluding proceeds from equipment sales, that compares to £1.5bn and £1.2bn respectively last year. Lower levels of replacement mean the average age of the fleet increased from 36 months a year ago to 41 months at the end of the current financial year. The group made five bolt-on acquisitions during the year, for a total value of £125m.
Free cash flow was £1.4bn, up from £792m. That reflects lower capital expenditure and allowed the group to reduce net debt from £5.4bn to £4.2bn. Net debt fell from 1.9 times cash profits to 1.4 times cash profits, under the group's 1.5-2.0 times range.
Ashtead is looking to achieve 6-9% rental revenue growth in the coming financial year, with capital expenditure of £1.37bn - £1.54bn, and free cash flow of £600m-£800m. The group plans to return £1bn to shareholders via share buybacks over the next two years.
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