Ashtead Group plc (AHT) Ordinary 10p
HL comment (16 September 2021)
First quarter revenue rose 21% to $1.9bn, reflecting a 22% jump in Rental revenue, which makes up 90% of the group total. Compared to pre-pandemic levels, Rental revenue was up 12%.
Operating profits rose 53% to $477m.
Ashtead now expects full year Rental revenue to rise 13 - 16%, up from 6%-9%, as Canada and the UK are surpassing expectations.
The shares rose 2.9% following the announcement.
Ashtead is enjoying the spoils that come with the world reopening. The company rents out construction equipment, particularly in the US, and construction in general is a cyclical business. It booms and busts along with the wider economy.
Rental revenue unsurprisingly fell over the pandemic, which is partly why the results look so flattering this quarter. Increased demand from emergency services and key industries like utilities and telecoms also helps buoy results in difficult times - contracts with the Department of Health in the UK is a perfect example of this more resilient type of contract. It also helps that recently the group has diversified into areas other than construction, which was a large driver behind the impressive revenue growth in Q1.
However, the real area of success has been cash flow.
Despite lower operating profits, operating cash flow rose 49% last year. That reflects the decision to delay the replacement of existing rental equipment. Delaying capital expenditure is probably a strategy that works best during a short-sharp downturn - as we saw last year. This gave Ashtead lots of financial flexibility, despite having a high proportion of inflexible operating costs. And it's this very strong free cash flow that has driven a fall in net debt, putting the group in a strong financial position.
Laying a strong financial foundation is also why the group feels confident enough to start re-cranking the spending tap, with capex guidance upgraded. This ties in with the fact Governments are planning massive fiscal stimulus over the coming years, particularly in the US where planned infrastructure spending has barely begun. That would be good news for the wider construction industry and could spark a surge in rental demand.
The balance sheet 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 £1bn share buyback programme comes while the shares are trading on their highest ever price-to-book ratio. 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.
Still, the combination of a positive outlook for the group's end markets and a rock-solid balance sheet means the company deserves to be riding high. A competitive position in the fragmented equipment hire business provides scope for long term growth. The sky-high valuation means investors should make sure they're in for the long haul and prepared for some potentially disappointing results in the short to medium term.
Ashtead Group key facts
- Price/Earnings ratio: 25.7
- 10 year average Price/Earnings ratio: 14.9
- Prospective dividend yield (next 12 months): 1.0%
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
In the US, Ashtead's biggest market, rental revenue rose 16% to $1.1bn, partly reflecting the group's efforts to increase its speciality businesses. Most of the revenue increase was driven by volume rather than price, although rates have started to pick up. Total revenue, including new and used equipment, merchandise and consumable sales, increased 14% to $1.5bn. Underlying operating profit rose by a third to $432.1m.
UK revenue was $265.7m, up from $154.3m. Largely reflecting the group's work with the Department of Health, which made up 34% of revenue. Underling operating profits rose from $10.4m to $44.0m.
Rental revenue made up the bulk of Canada's revenue, with this rising 81%. That's partly because demand was very subdued this time last year. Underlying operating profit reached $28.2m.
Supply chain delays meant fleet deliveries were slower than expected, so Ashtead is keeping some equipment longer than normal to meet demand. The average age of the fleet has risen by 3 months, to 41 months.
Capital expenditure, net of disposal proceeds, was $477, up significantly on last year's $30m. The group spent $123m on five bolt-on acquisitions in the period. Gross capital expenditure for the full year is now expected to be $2.0bn - $2.3bn, up from previous guidance of $1.9bn -$2.2bn.
The increased spending meant free cash flow fell from $558m to $420m, despite the higher profits. Underlying net debt is now equivalent to 1.3 times cash profits (EBITDA), down from 1.8, and slightly below Ashtead's targets.
The group reiterated its policy of "a progressive dividend with consideration to both profitability and cash generation that is sustainable through the cycle".
This article is original Hargreaves Lansdown content, published by Hargreaves Lansdown. 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.
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