Ride Ashtead upgrade cycle

In fact, Ashtead's success story has its roots in the downturn of the group's key end market - the US construction industry. During the downturn, capital investment was curtailed and companies took the decision to hire, rather than buy, construction equipment. The lack of investment also meant that ageing construction equipment was not replaced and when construction companies did get a bit of work, they found their own equipment was not always up to the job.

That's all contributed to a structural growth story for rental equipment that Ashtead has been well-placed to benefit from. Two factors have helped Ashtead cement its market position. First, the downturn squeezed out some of its competitors. And second, Ashtead had a strong enough balance sheet to keep investing in its hire fleet during the lean times. That has meant it can offer better-quality equipment than its cash-strapped rivals.

The US construction market is now firming up. Construction equipment giant Caterpillar recently reported that its construction customers in the US are upbeat, but it also noted that the US construction industry is still well below its 2006 peak so the recovery is not complete just yet.

That suggests further upside for Ashtead's US unit, Sunbelt, which accounts for around 85 per cent of group sales. The group's recent third-quarter update reported 22 per cent revenue growth for Sunbelt. And, impressively, almost two-thirds of Sunbelt's revenue growth dropped through to cash profits (Ebitda), so its cash profits margin hit a record 46 per cent for the nine-month period.

Ashtead's UK hire business A-Plant is much smaller, accounting for the remaining 15 per cent of group revenues. Its rebound has lagged Sunbelt's. But there are signs it is following Sunbelt up. A-Plant achieved rental revenue growth of 9 per cent in the year ended April 2013 in what was described by the group as "difficult market conditions". But in the first nine months of the current financial year, that growth rate had accelerated to 18 per cent and the operating margin was up to 10.6 per cent from 5.9 per cent in the previous financial year.

That uplift, together with the continued momentum in Sunbelt, meant that Ashtead's nine-month pre-tax profit was up 51 per cent at constant exchange rates to a record £293m. The group's return on investment, a key measure given the capital-intensive nature of a hire business, rose to 18 per cent from 15 per cent in the comparable period.

Ashtead has said its capital expenditure will be around £700m in the financial year just ended, with a similar level planned for the next financial year as it invests in its fleet to capitalise on improving market conditions. This is a significant sum - almost double the forecast pre-tax profit - but the balance sheet can support it. The group's net debt to Ebita ratio was two times at the nine-month update, which looks comfortable.