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Ashtead Group - First quarter revenues up 25%

Ashstead had a "strong" first quarter with revenue, excluding the impact of exchange rates, up 25% to $2.3bn...

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Ashtead had a ''strong'' first quarter with revenue, excluding the impact of exchange rates, up 25% to $2.3bn and underlying profit before tax up 29% to $555m. The performance was driven by a 26% rise in equipment rental income, with contributions from both price and volume increases.

In the period Ashtead spent $119m on share buybacks.

The shares were down 3.2% in early trading.

View the latest Ashtead share price and how to deal

Our view

Ashtead's showing no signs of a slowdown, despite the increased risks of a global recession and wider economic pressures. So far, Ashtead, which rents construction and industrial equipment, has been able to pass on much of the increasing cost burden to its customers, giving management the confidence to raise revenue guidance.

The smaller UK division has seen growth slow as COVID test centre income has tailed off. However, stripping out work for the Department of Health, rental income is still experiencing double digit growth.

But looking at the core US business, strong organic growth is continuing. Diversification has been called out as a driver of sales growth. Ashtead continues to invest boldly both internally (essential for maintaining a fleet of best in class equipment) as well as in mopping up competitors in this fragmented market.

The potential for increased fiscal stimulus over the coming years plays into Ashtead's hands, particularly in the US, an area of focus for the group's investment, where planned infrastructure spending still has room to run. That would be good news for the wider construction industry and could spark a surge in rental demand. This remains a growth driver in our view, but a looming recession could temper spending somewhat in the near-term.

The balance sheet is in reasonable health, and 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, too.

A competitive position in the fragmented equipment hire business provides scope for long term growth. The shares change hands below the 10 year average, when looking at the price to earnings ratio, which could represent an attractive entry point for investors. Keep in mind that also reflects concerns that global economic uncertainty could derail Ashtead's progress if economic conditions take a turn for the worse. Construction spending has tended to ebb and flow at the same rate as the wider economy.

The threat of an economic slowdown is very real though, and investors should be prepared for some volatility. On the flipside, economic pressure could also further accelerate the structural changes that Ashtead has continued to benefit from.

A rental model allows end users greater flexibility and can also help to counter supply-chain issues. The proportion of equipment owned by rental companies has increased dramatically and Ashtead believes the 55% seen in the US has room to grow. That's especially true when you consider the rental proportion of equipment in the UK is at 75%. And whilst market share has been growing there is still plenty more to go for. We believe that Ashtead is well placed to ride out storms and the current environment may well present further opportunities for consolidation

Ashtead Group key facts

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.

First Quarter results to 31 July 2022

The US comprises 84% of total revenue ($1.9bn up 30%) and over 90% of operating profit ($567m). Rental only revenue grew 26% to $1.4bn, with organic revenue growth taking the lion's share of 20% and the remaining 6% relating to acquisitions.

The UK was more muted with total revenue declining 16% to $223m, reflecting strong comparatives and a much lower contribution from the decommissioning of COVID testing centres as well as a fall equipment sales. Encouragingly, in sterling terms rental only income was up 5% but a weak pound meant it was still down when reported in US dollars.

Canada saw total reported revenue rise 13% to US$137m, with rental income rising 15% to US$123m despite the threat of industrial action earlier in the year.

Despite inflationary pressures a strong pricing environment enabled underlying operating profit to increase 26%, excluding the impact of exchange rates, in line with revenues to $622m.

Free cash flow was down to $91m from $420m reflecting a doubling of capital expenditure to $667m. A further $337m was spent on 12 bolt-on acquisitions. Ashtead ended July with net debt of $7.7bn, which was comfortably within its target range of 1.5 to 2 times EBITDA (cash profit).

The increased interest costs are offsetting the better than expected operational performance and therefore Ashstead's underlying full year pre-tax profit guidance remains unchanged.

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 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 disclosure for more information.

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Written by
Derren Nathan
Derren Nathan
Head of Equity Research

Derren leads our Equity Research team with more than 15 years of experience in his field. Thriving in a passionate environment, Derren finds motivation in intellectual challenges and exploring diverse ideas within his writing.

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Article history
Published: 6th September 2022