Ashtead reported a 9% rise in third-quarter revenue, excluding exchange rate impacts, to $2.7bn. Underlying profit before tax was down 11% to $473mn, driven by a higher depreciation charge and a bigger interest bill. Performance was slightly worse than markets were expecting.
Net debt on 31 January 2024 was $11.2bn (2023: $8.8bn). The worse position was driven by a free cash outflow over the first nine months of $462.5mn.
Rental revenue growth for the year is now expected to be at the low end of the 11-13% guided range.
The shares were down 6.5% in early trading.
Our view
Markets had already been warned to expect a growth slowdown, but third-quarter results still came in slightly worse than expected. Fewer natural disasters and the writers' and actors' strikes lasting longer than expected have dampened demand for the construction and industrial equipment it rents out, especially in North America.
Medium term guidance was a little cautious, especially on the capital expenditure side which points to a c.25% reduction in investment compared to group estimates for the current year.
Markets may not have reacted well, but it’s worth keeping things in context.
Recent performance has been at record levels and even the previously lowered guidance still points to double digit top line growth. We're fairly optimistic that the events that caused the downgrade are likely to be one-offs and the impacts should be contained to the current financial year.
North America remains the real growth opportunity for Ashtead, and over the medium term, we still think the outlook is promising. There are several growth drivers here, including the onshoring of supply chains to government legislation looking to expand infrastructure and chip manufacturing.
Ashtead's scale and expertise are proving valuable, and the group's taking around 30% market share of these mega projects in the US. The bigger players have an advantage in the fragmented industry, and the balance sheet's being flexed to snap up smaller players in the space.
Growing the speciality business is also a key strategy (things like scaffolding, flooring and air conditioning). These businesses present a varied income stream for Ashtead which should help provide a little more resilience during downturns.
But, in the end, construction is a cyclical business. Demand tends to ebb and flow alongside economic conditions. In the key US market, the chance of lower economic output remains a risk - even if there's not technically a recession in the region.
Debt has risen as investment in expansion continues, but 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.
Longer term, we're supportive of the sector with several structural tailwinds underway and we prefer larger-scale names like Ashtead. We continue to expect growth in the top and bottom lines, and still see some upside to the current valuation. But despite some softer growth, recent valuation moves have been positive, increasing the chances of poor reactions to missteps.
Ashtead key facts
All ratios are sourced from Refinitiv, 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 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.