Ashtead Group plc (AHT) Ordinary 10p
HL comment (8 September 2020)
Ashtead reported an 8% decline in rental revenue in the first quarter to £1.1bn, as coronavirus and accompanying lockdowns negatively impacted activity. Profit before tax fell 35% to £208m, as the group didn't make any redundancies, continued to invest in the business and didn't accept any government support.
The group's shares were flat following the announcement.
Ashtead rents out construction equipment. Construction in general is a cyclical business that has tended to follow the booms and busts of the wider economy, and historically Ashtead's fortunes have followed suit.
However, the group has weathered the early days of the current crisis rather well - in truth, far better than we had expected. Rental revenue has fallen, but thanks to Ashtead's essential business status, its shops remain open. Increased demand from emergency services and key industries like utilities and telecoms has helped offset some of the reduced construction demand.
With rental revenue stabilising and the group modelling positive free cash flow even in some pretty tough conditions, Ashtead looks like it will be able to weather the immediate lockdown fall-out. It helps that management have taken some pretty drastic steps to preserve cash and boost liquidity.
The share buyback programme has been scrapped - although with a share price higher than it was a year ago that's less painful than some other companies we could mention. Capital expenditure guidance for 2021 is way down and even below this year's replacement capex (meaning the overall fleet is set to shrink this year).
Against that background the decision to grow the dividend is clearly a sign of confidence. However, we have some concerns about the outlook once the immediate impact of the lockdowns is over. An economic downturn looks increasingly inevitable and, while government spending on infrastructure will probably provide a cushion, it's unlikely construction will bounce back quickly. That would have negative effects for fleet utilisation and rates - creating a longer term drag on revenues.
We take comfort in the fact that Ashtead has access to significant liquidity, and longer term its competitive position in the fragmented equipment hire business is attractive. However, we're not sure the group's valuation necessarily reflects the near-term challenges.
At over 4 times book value, the shares are trading close to highs achieved when conditions were far kinder. Despite the impressive resilience, investors should make sure they're in for the long haul and prepared for some potentially disappointing results in the short to medium term.
First Quarter Trading Update
Sunbelt is designated as an essential business in the US, UK and Canada, and so has continued to trade throughout the crisis. It has also benefited from supporting government and private sector responses to the crisis.
Rental revenues were 8% lower than last year in the US, with growth in speciality equipment offsetting weaker results in general tools. Profits in the region fell 27.4% to $324.1m or £259.2m.
Canada reported a 2% decline in rental revenues, however that reflects the acquisition of William F. White, without which revenue would have declined 11%. Total revenues in the region stood at C$90m, with profits falling from C$16m to a C$0.1m loss. In the UK revenues fell 9% to £80m, despite the group providing support to the Department of Health. Profit in the region fell 46.1% to £8.3m.
The group reported a significant decline in capital expenditure year-on-year, with net expenditure of just £24m compared to £451m in 2019. Full year capital expenditure is expected to be in the region of £500m, though this may change based on conditions. As at 31 July the fleet was valued at a cost of £9bn and an average age of 38 months (2019: 33 months).
Free cash in the quarter came in at £447m, reflecting the significant decline in capital expenditure. As a result net debt fell by £541m (with net debt also benefiting from stronger sterling) and now stands at £4.8bn or 2.2 times cash profits.
The group has access to $2.8bn of secured financing.
Ashtead key facts
- Price/Book ratio: 4.1
- 10 year average Price/Book ratio: 3.3
- Prospective yield: 1.6%
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. Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Thomson Reuters. 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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