Slave to the cycle
Equipment hire companies are cyclical, due to their reliance on the construction and industrial sectors they serve. Consider this first graph of the performance against the FTSE All-Share of a Capital IQ-generated index comprising Speedy, Ashtead (AHT), Vp (VP.), Lavendon (LVD) and HSS Hire (HSS).
Rapid expansion in the boom years led to heavy falls following the financial crash, with a couple of extreme rags-to-riches-to-rags stories here accentuating the spike. With the gentle economic recovery that we have seen and the revival of the construction sector, the index had been strengthening so far this decade, before a big wobble from the end of 2015.
Ups and downs for the sector
20 years against the FTSE All-Share, % change
Winners and losers
Our second chart looks at the relative share price performance of the sector constituents since the arrival on the stock market of HSS Hire in February last year. The aforementioned downtrend came at just the wrong time for the group, which suffered weakness in some key accounts and a drop in demand for cooling equipment.
It is not difficult to guess, looking at this graph, which are the two companies that have discussed a merger under some shareholder pressure. Speedy has faced operational challenges that are partly of its own making, with management admitting poor systems implementation and a lack of focus on customers. Meanwhile, Ashtead has benefited from the construction revival across the pond.
Winners and losers since HSS listing
Share price movement (%)
Shelter from the storm
Sizing up the near-term prospects for domestic construction is incredibly difficult. The latest survey of purchasing managers in the industry by Markit/CIPS gave a score of 49.2 in August, with only a score above 50 signalling expansion, although this was up from a seven-year low of 45.9 in July. But some market commentators are more bullish, expecting the new prime minister to stimulate the sector in order to support a broader economic recovery.
So it is unsurprising that some investors have agitated for the two smallest companies to shelter together. There's a final graph that helps show us why: the return on capital (RoC) across the businesses, with Speedy and HSS footing the table, at 2 and 3 per cent respectively (Ashted's is closer to 14). It should be added, though, that this Capital IQ figure undershoots the bespoke 'return on capital employed' or equivalent metrics used by the companies themselves.
Comparing return on capital
Ashtead tops the group
Speedy's board, at least, has decided a merger is not in the best interests of shareholders, and that its restructuring is progressing effectively. Perhaps looking at performance over a short timeframe does not do justice to either company. But a combination of the two companies would on current market value leapfrog both Vp and Lavendon: it's a tempting option.