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Ashtead - revenue guidance ticks higher

Ashtead reported a 25% increase in revenue over the first nine months, excluding the impact of exchange rates, to $7.2bn.

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Ashtead reported a 25% increase in revenue over the first nine months, excluding the impact of exchange rates, to $7.2bn. Performance was largely driven by rental revenue growth in the largest region, the US, and Canada. The UK posted single-digit revenue growth.

Underlying profit before tax rose 26% to $1.8bn, driven by top-line growth and a small increase in margins.

The Group generated free cash flow of $295m (2022: $738m), the decline due to higher capital expenditure. Net debt rose to $8.8bn (2022: $6.9bn) as cash made its way back to shareholders and the group invested in bolt-on acquisitions.

Full-year rental revenue is now expected to grow 21-23%, up from previous guidance of 18-21%. Free cash flow is expected around $300m.

The shares rose 3.4% in early trading.

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Our view

Ashtead, which rents construction and industrial equipment, continues to take advantage of a healthy environment despite the obvious recession clouds circling above.

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 spend 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 customers 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 like it could have a softer landing.

Longer term, we're supportive of the sector with several structural tailwinds underway and we prefer larger-scale names like Ashtead. Though, 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. But markets are fickle and the valuation would come under pressure if sentiment were to reverse.

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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Written by
Matt Britzman
Equity Analyst

Matt is an Equity Analyst on the share research team, providing up-to-date research and analysis on individual companies and wider sectors.

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Article history
Published: 7th March 2023