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Ashtead - strategy execution drives growth

Full year revenue met expectations and rose 19% to $8.0bn, reflecting a 22% rise in rental revenue and growth...

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Full year revenue met expectations and rose 19% to $8.0bn, reflecting a 22% rise in rental revenue and growth across all geographies ignoring the impact of exchange rates. This was a 23% increase compared to pre-covid times.

The revenue growth fed into a 38% increase in underlying profit before tax to$1.8m. This was helped by saving efforts, although higher levels of activity meant some costs returned.

Ashtead's expecting rental revenue to rise 12-14%, as growth in the US and Canada offsets a decline in the UK as pandemic-related medical demand wanes.

The group spent $414m on share buybacks this year and a $0.675 final dividend was announced, bringing the total to $0.80 for the year.

The shares rose 1.2% following the announcement.

View the latest Ashtead share price and how to deal

Our view

Ashtead's been making hay while the sun shines. The group's been able to flex its operations to deal with a challenging environment, adjusting plans to sell its existing equipment to cope with supply-chain delays on new deliveries. This allowed it to take full advantage of the post-pandemic construction boom.

In addition to servicing the pent-up demand as the world reopened, Ashtead also benefitted from contracts with the NHS to support covid testing. That make up almost a third of its UK income, but now that testing's been abandoned it will create a sharp drop-off in that division.

But the group's progress broadening its end markets, particularly in the US should offset this loss of business. We're already starting to see the rewards in the US, where diversification has been called out as a driver of sales growth.

This top line growth is essential as operations return to normalcy. The group put off spending throughout the pandemic to protect cashflow, but management is turning the tap back on. Delaying capital expenditure is probably a strategy that works best during a short-sharp downturn and gave Ashtead lots of financial flexibility, despite having a high proportion of inflexible operating costs.

This ties in with the fact Governments are planning massive fiscal stimulus over the coming years, 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.

Just over $400m was spent buying back shares last year, as part of the share buyback scheme, over a period when the shares have been trading at a significant premium. Buying back expensive shares has been a common way to destroy shareholder value in the past - and we would really rather that cash was either deployed within the business or paid out as a special dividend. Moving forward, we don't expect the current level of buybacks to be sustained with capex back on the rise.

The combination of a positive outlook for the group's end markets and a strong balance sheet means the company's well positioned. And a competitive position in the fragmented equipment hire business provides scope for long term growth. The valuation has rerated significantly over the past 6 months and that makes the entry point attractive. However, global uncertainty poses a risk and if economic conditions take a turn for the worse, construction spending could come under fire.

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.

Full Year Results (underlying, constant currency)

A 22% increase in rental revenue in the US helped total sales rise from $5.4bn to $6.5bn. This reflected the group's efforts to broaden its end markets and a strong performance in specialty markets. This fed into a 28% increase in operating profits to $1.9bn

Rising rental revenue and equipment sales meant sales in the UK rose from $838.1m to $986.3m. This was thanks in part to supporting the NHS with its covid response, which accounted for around 30% of overall revenue. Operating profit increased 46.8% to $118m.

Revenue in Canada rose to $499m from $383m reflecting the weak performance last year. Operating profit increased 53% to $114.4m.

Capital expenditure for the year was $2.0bn net of sale proceeds. Supply chain issues mean the group delayed some of its fleet sales. As at 30 April 2022 the fleet was worth $13.5bn with an average age of 40 months. Ashtead's expecting to spend between $3.3bn and $3.6bn in the year ahead.

Free cash flow fell from $1.8bn to $1.1bn, reflecting capital expenditure that was more than double last year. Shareholder returns together with acquisition costs outpaced free cash flow. That meant underlying net debt rose from $4.2bn to $5.2bn or 1.5 times underlying cash profits, within the group's target range.

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
Laura Hoy
Laura Hoy
ESG Analyst

Laura is part of HL's ESG analysis team, working to offer research and analysis to help with sustainable decision making. She also works with other parts of the business to help integrate ESG.

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Article history
Published: 14th June 2022