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Ashtead - higher rental rates drive growth

First half revenue rose 26% to $4.8bn, ignoring the effect of exchange rates.

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First half revenue rose 26% to $4.8bn, ignoring the effect of exchange rates. Growth was driven by rental only revenue in the US, up 26% to $3.0bn, benefiting from both volume and rate improvements.

The higher revenue offset the impact of higher costs because of inflation, meaning underlying profit before tax rose 28% to $1.2bn. Operating costs were up 24 to $2.6bn.

Free cash flow fell from $440m to $154m, largely a result of higher ongoing capital expenditures. The group also invested $609m in 27 bolt-on acquisitions over the half. Net debt, including lease liabilities, rose from $7.2bn at the beginning of the period, to $8.4bn.

The board has announced an interim dividend of 15 cents per share, up 20%. The group spent $207m on share buybacks as part of the two-year programme, which goes up to $1bn.

Group rental revenue growth is now expected between 18-21%, up from previous guidance of 15-17%. Free cash flow guidance remains unchanged at $300m.

The shares rose 2.9% following the announcement.

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Our view

Ashtead's showing no signs of a slowdown, despite the increased risks of a global recession and wider economic pressures. Ashtead, which rents construction and industrial equipment, has been able to pass on much of the increasing cost burden to its customers. That's given 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. Ashtead's scale and expertise should place it well to be a key supplier for large-scale projects.

We're also supportive of the rental model, which allows end users greater flexibility and helps to counter ongoing 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. We're inclined to agree when you consider the rental proportion of equipment in the UK is at 75%.

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.

There are challenges though, not least of which are increasing costs. Ashtead's been able to pass these on through rent rises, but it's still having a dampening effect on margin growth.

There's also a very real recession risk to consider. Construction is a cyclical business, meaning demand tends to ebb and flow alongside economic conditions. Markets are pricing in a recession in both the UK and US next year. Though there's a slither of good news for Ashtead, in that its key US market looks likely to have a softer landing.

Over the last couple of months, cyclical stocks have had a positive reaction to data suggesting a US recession may not be as bad as once feared, and that's pushed the valuation ahead of its longer-term average. Though markets are fickle, and the valuation come under pressure if sentiment were to reverse. Longer term, Ashtead looks well placed to benefit from several structural tailwinds and we prefer the larger-scale names in the sector.

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.

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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Article history
Published: 6th December 2022