Sunbelt Rental’s fourth-quarter revenue rose 8.9% to $2.8bn, largely driven by rental revenue growth of 8.0%.
Underlying operating profit (EBITDA) fell by 1.3% to $1.1bn, due to an unfavourable shift in product mix, higher internal repair costs and repositioning of its fleet.
Free cash flow fell 29.8% to £0.6bn, largely due to increased purchases of rental equipment in the period. Net debt rose 1.0% to $7.6bn over the year.
For the year ahead, rental revenue is expected to grow by 5-8% (4.8% expected). Underlying operating profit is expected to grow from $4.7bn last year, to between $4.9-5.1bn ($4.9bn expected).
A final dividend of $0.75 per share was announced, taking the full-year total to $1.125, up $4%.
The shares fell 9.4% on the day.
Our view
Sunbelt (formerly Ashtead) delivered another decent set of full-year results and encouraging guidance. But markets focussed on weaker margins in the final quarter, sending the shares sharply down on the day, which looks a touch overdone to us. Margins should improve again later this year as mega projects reach more lucrative stages.
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 beneficiary 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 offer a varied income stream for Sunbelt, which should help provide a little more resilience during downturns. The recent $650mn acquisition of Reliant Asset Management expands the group’s portfolio into modular offices and classrooms, and management’s hopeful that the business can double in size over the next few years.
We think capital discipline and better utilisation of the existing fleet can drive an acceleration in top-line growth, and improved profit and cash flows. 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.
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