Ashtead upgrades guidance after strong second quarter

Equipment rental group Ashtead (AHT) saw its underlying cash profits (Ebitda) fall by 7 per cent year on year to £1.2bn in the six months to 31 October. This came amid the pandemic disruption to hire demand and high fixed costs as it opted not to trim its workforce. There was a significant improvement between the first and second quarters, however, with the decline in cash profits slowing from 14 per cent to just 1 per cent. Second-quarter cash profits came in at £663m, ahead of analyst expectations of £608m.  

In the all-important US market, rental revenue only dipped by 6 per cent versus a year earlier thanks to 12 per cent growth from speciality tool hire and the need for equipment for hurricane clean-up efforts. Ashtead has reduced its dependence on construction markets since the last recession, diversifying into areas such back-up power supplies for utility and telecoms companies.

Following a resilient first half, the group now believes its full-year numbers will exceed previous guidance. It had been anticipating a 5 to 9 per cent contraction in full-year rental revenue, but is now pointing to a 3 to 7 per cent decline on the back of an improved US outlook and strong growth in the UK and Canada.

In response to the pandemic, Ashtead cut back on its first-half operating costs and slashed gross capital expenditure by two-thirds. While this has increased the average age of the rental fleet from 33 months to 39 months, it has also translated to record free cash flow of £822m, up from £228m a year earlier. This means that net debt (excluding lease liabilities) has come down by 16 per cent since the April year-end to £3.6bn. Equivalent to 1.7 times underlying cash profits, this is within Ashtead’s target multiple range of between 1.5 and 2. While the share buyback programme remains suspended, the group has held the half-year dividend steady and resumed new site openings.  

Despite the earnings pressure this year, Ashtead’s shares have continued to climb upwards and are now up almost two-fifths so far this year. They are currently trading at 20 times forecast 2022 earnings, which may seem expensive for a company with such cyclical exposure. But it has weathered the pandemic well thus far and will benefit from any US fiscal stimulus that encourages building activity. There is also the long-term structural growth potential of the relatively immature US equipment rental market. Buy.  

Last IC View: Hold, 2,649p, 16 Jun 2020