- Trading buoyant in seasonally quiet fourth quarter
- EPS estimates upgraded for third time since September
Ashtead Technology (AT.:311p), a leading independent subsea rentals and services group that supports the installation, inspection, maintenance and repair (IMR), and decommissioning of infrastructure across the offshore energy industry, has issued yet another upbeat trading update.
In the autumn, house broker Numis Securities pushed through 9-11 per cent increases in its earnings per share (EPS) expectations across the 2022 to 2024 forecast period, having previously upgraded estimates in early September (‘Profit from the renewable energy boom’, 3 November 2022). At the time, analysts had been expecting 2022 revenue to surge 26 per cent to £70mn, buoyed by 21 per cent like-for-like growth and a contribution from small earnings-accretive bolt-on acquisitions.
However, robust trading in the third quarter continued into the seasonally quieter final quarter of 2022, with high levels of activity across offshore wind and oil and gas markets, in part supported by more favourable weather, resulting in project extensions and new contract wins. As a result, Ashtead’s management now expects to deliver 30 per cent higher revenue of £72.5mn in 2022. Excluding acquisitions, revenue increased by 28 per cent inclusive of 6 per cent growth from favourable exchange rates.
Both pricing and utilisation rates remain strong, so much so that Numis lifted its 2022 pre-tax profit and EPS estimates by a further 6 per cent to £18.6mn and 18.6p, respectively, and pushed through similar upgrades to its 2023 forecasts. On this basis, expect current-year pre-tax profit of £24mn on annual revenue of £89mn to produce EPS of 23.5p. Furthermore, the increasing breadth of Ashtead’s asset base and service offering, coupled with robust end markets, suggest the earnings upgrade cycle has further to run.
Exploit profit-taking after share price hits record high
The latest earnings upgrade propelled Ashtead’s share price to a record high of 355p earlier this week, well above the 325p target I outlined when I initiated coverage at 257.5p. I also reiterated that buy call, at 259p, in early November. However, the share price has subsequently dipped to 309p on news that some investors have been banking gains, including an entity, BP Bidco, controlled by Buckthorn Partners and certain members of Ashtead’s management team.
BP Bidco offloaded 15mn shares in a placing, at 310p, to reduce its stake from 28 per cent to 9.2 per cent, and chief executive Allan Pirie and chief finance officer Ingrid Stewart sold 425,000 shares and 35,000 shares, respectively, for estate planning and personal financial reasons. The directors still retain stakes of 2.2 per cent and 0.3 per cent in the company.
I don’t have a problem with the profit-taking as it has broadened the shareholder base and means that institutions that were unable to get hold of enough stock at the time of the November 2021 IPO are now invested for long-term gains. I also feel that the share price decline is overdone as Ashtead’s shares are now trading on a current-year price/earnings (PE) ratio of 13.2, a modest multiple for a business that is underpinned by secular growth drivers that are highly supportive of Ashtead delivering 26 per cent EPS growth in 2023.
Indeed, the greater focus on energy security and transition to renewables is playing to Ashtead’s strengths, the revenue contribution from wind generation alone has more than trebled in the past four years to account for a third of group revenue. Tight market conditions – lead times for new equipment and spares continue to rise – mean customers are increasingly renting equipment, thus enabling Ashtead to raise cost utilisation rates and maintain strong margins on pricing.
Once the dust settles from this week’s placing, I expect Ashtead’s share price to recover strongly, so much so that I am raising my target price from 325p to 375p, still below Numis’ upgraded target of 400p (from 380p). Buy.
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