Ashtead forecasts megaproject profits

The US’s building boom continues despite economic headaches, with megaprojects leading the way instead of office or homebuilding. For equipment rental giant Ashtead (AHT), this means a continued effort to grow market share by buying up other operators and new equipment. 

That requires a capital spending boost, and the company is also working its balance sheet hard by completing a $264mn (£210mn) share buyback programme and now raising the dividend, meaning it has added to its already sizeable debt pile.

The positives include higher profits in the past year, thanks to better US sales and cost controls, and the prospect of continued improvement in demand in that key market. Canada and the UK have weaker prospects, particularly as the writers’ strike in Hollywood has halted production of movies and TV shows in Canada, which has a significant filmmaking industry, 

Cash profits for the 2023 financial year climbed by 24 per cent to $4.4bn, with the group margin flat overall at 45.6 per cent. While margins slipped in the UK and Canada, the key US market held firm at 48 per cent. “US rental revenue drop-through to Ebitda has improved as we have progressed through the year, and in the fourth quarter was 54 per cent, resulting in drop-through of 50 per cent for the year,” the company said. 

Chief executive Brendan Horgan said the growing number of megaprojects in the US would keep driving construction rentals and help Ashtead build its market share. It's not all rosy there, however. On a call with analysts, management said clients were taking longer to pay bills in the current financial year, but added that bad debts had not climbed. Receivables rose from $1.39bn last year to $1.66bn in the period, while receivable days were flat. 

Ashtead has guided for 13-16 per cent sales growth in the current financial year, albeit with lower free cash flow ($300mn against $532mn) as a result of higher capital spending. This is the same approach as last year – spending on rental equipment rose from $2bn in the 2022 financial year to $3.3bn in 2023. 

Consensus forecasts see cash profits hitting $5bn in the current financial year and net debt climbing again before falling in 2025. The lower free cash flow and high debt does remain a concern, however, even if the first major portion of that debt only falls due in 2026. Hold. 

Last IC View: Hold, 5,108p, 6 Dec 2022