Ashtead facing bleak prospects

Ashtead - which specialises in renting equipment to customers that operate in such sectors as housebuilding, facilities management, or traffic management - is suffering an especially grim time as the recession bites. Indeed, the company's first-quarter figures for 2009-10, which were released earlier this month, look particularly bleak. In the three months to end-July, Ashtead's revenue fell 19 per cent to £222m, prompting underlying pre-tax profits to slump by 75 per cent to £8.8m.

Given the group's reliance on the struggling US construction sector - its US Sunbelt operation generates over 80 per cent of the group's sales - then the slowdown is understandable. After all, the US government released figures this month reporting that US construction spending had fallen 0.2 per cent between June and July, and was 10.5 per cent below July 2008’s figure. True, the Obama administration's $787bn (£745bn) economic stimulus package should eventually make a difference to precisely those companies that rent Ashtead's equipment. But that stimulus is taking longer to filter through to Ashtead's customers than first assumed. That's because only 11 per cent of the $308bn allocated for infrastructure spending in the scheme will have been spent by the end of September, with just half having been used up by end-September 2010. Worse, it seems that some US states may be using the federal funds simply to fill the gaps created by their own spending cuts.

The UK operation - called A-Plant - is hardly booming, either. That's responsible for the remainder of group sales and A-Plant's turnover in the three months to end-July slipped 29 per cent year-on-year. As with the US, the UK’s construction sector is struggling, and UK construction output in the year to the end of June fell 10 per cent year on year. Not surprisingly, then, Ashtead's bosses sound cautious about the future. "We expect that market conditions and trading levels will remain largely unchanged for the second quarter," said Ashtead's chief executive, Geoff Drabble, with the first-quarter figures, adding that the outlook for the second half of the year, which is Ashtead's leaner period anyway, is especially unclear.

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However, Ashtead's bosses are doing their best to cope with such tough trading conditions by focusing on cutting costs. First-quarter operating costs at Sunbelt, for instance, were down 28 per cent year-on-year; while operating costs dropped 23 per cent at A-Plant. Capital expenditure is being reigned-in, too, with the anticipated £75m of net capital spending this year to be used for equipment replacement only - not to support growth. Ashtead also reported market share gains with the first-quarter figures - not a bad result given tough trading conditions and highly fragmented markets. Broker Investec Securities reckons that the group now has 4 per cent of the US equipment rental market and a 5 per cent slice of the UK market. Despite that progress, however, Ashtead's operating profit margins still fell to 10.8 per cent in the three months to end-July, from 18.9 per cent a year earlier.

The company's huge debt burden remains an expensive problem, too. Admittedly, the net debt pile did fall in the first quarter from £1.04bn to £873m. But that’s still getting on for double the market value of Ashtead's equity and meant a financing cost of £15m in the first quarter of the group's financial year alone. Indeed, finance related expenses cost Ashtead £68m in the year to end-April 2009 - that's a big cost compared with the group's underlying operating profit in 2008-09 of £155m. Happily, he funding position does, at least, look stable. Loan covenants don't seem to be a problem and the first of Ashtead's loan facilities doesn't mature until August 2011.