Sunbelt Rentals’ third-quarter revenue rose by 2.7% to $2.6bn, driven by rental revenue growth of 2.6%. Underlying cash profit (EBITDA) was flat at $1.1bn.
Free cash flow rose from $0.8bn to $1.4bn over the first nine months, due to reduced capital spending. Net debt ended the period at $7.6bn.
A new $1.5bn buyback commenced on March 2, following completion of the previous $1.5bn programme in February. An interim dividend of $0.375 was also paid in February.
Guidance has been updated, with full-year rental revenue expected to grow by 2–3% (previously 0-4%), and free cash flow of around $2.0bn. Capex is now expected between $2.2-2.3bn (previously $1.8-2.2bn).
The shares were broadly flat following the release.
Our view
Sunbelt (formerly Ashtead) delivered another decent set of results, marking its third consecutive quarter of revenue growth. The construction market is still soft in places, there are some niggles on margins going forward, but overall, we think the picture is looking more positive.
Sunbelt’s own ambition has perhaps been its downfall in recent times. Rapid expansion led to a period of overspending that coincided with a slowing market. But investment in the growing fleet has been reined in, which means even a small rise in fleet utilisation can have an outsized impact on margins and cash flows – and we’re already starting to see a cash flow benefit.
The more local market is still looking soft in places, with unpredictable trade policies making it hard for privately funded construction projects to get sign-off. But there are green shoots, and a big chunk of the demand for Sunbelt’s fleet of rental equipment comes from publicly funded projects, which should be more insulated.
North America is Sunbelt’s largest market and remains the real growth opportunity over the medium term. There are several growth drivers here, ranging from the onshoring of supply chains to government legislation looking to expand infrastructure and chip manufacturing.
Sunbelt’s scale and expertise are proving valuable, with its win rate on so called ‘mega-projects’ enough to warrant a step up and pull forward of investment plans. We don’t think this is an overspend like in the past, and believe management will remain disciplined, but it’s something to monitor.
The bigger players have an advantage in the fragmented industry, and there’s still scope to snap up smaller players in the space too. Cash flows have been a major benefactor of the reigned in spending, and the balance sheet is in a good position, giving management some options.
Growing the speciality business is also a key strategy (things like scaffolding, flooring and air conditioning). These businesses are higher growth and present a varied income stream for Sunbelt, which should help provide a little more resilience during downturns.
We think capital discipline and better utilisation of the existing fleet can drive improving profit and cash flow even if top-line growth is only in the low-single-digit range. We see upside over the medium term and the valuation isn’t overly demanding. The main risk is a delayed recovery in local markets, which could muddy the shape and timing of a return to profit growth.
Environmental, social and governance risk
General Industrial companies are medium risk in terms of ESG but can trend up to the higher end of the spectrum depending on subindustry. The primary risks can include labour relations, emissions (either product or production-based), business ethics and product governance. Other concerns are waste and health & safety.
According to Sustainalytics, Sunbelt’s overall management of material ESG issues is strong.
Sunbelt reports on Scope 1 and 2 emissions, has initiatives in place to reduce emissions, and aligns these initiatives with its risk management programme. Within the last three years, the company's carbon intensity trend experienced a moderate decline. ESG reporting is strong, and executive pay is explicitly tied to ESG performance targets.
Sunbelt Rentals key facts
All ratios are sourced from LSEG Datastream, based on previous day’s closing values. 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.
This article is original Hargreaves Lansdown content, published by Hargreaves Lansdown. It was correct as at the date of publication, and our views may have changed since then. Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by LSEG. 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.