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Ashtead on course to go higher

The equipment hire group is capitalising on an immature US rental market
February 13, 2020

Ashtead’s (AHT) activities aren't particularly complicated – it purchases equipment, rents it out to customers and sells it to the second-hand market after around seven years. With operations spanning the US, Canada and UK, its customer base ranges from the construction market to entertainment events, facilities maintenance and emergency services. The simple business model and the sensitivity of trading to the economic backdrop has produced impressive share price performance over the past decade. According to data from Refinitiv, it is the best performing FTSE 350 stock over the period. While some of this reflects a recovery from the shares' financial-crisis nadir, the performance is also underpinned by a track record of generating strong returns on the capital it invests (see chart).    

IC TIP: Buy at 2,629p
Tip style
Growth
Risk rating
Medium
Timescale
Medium Term
Bull points

Structural US growth opportunity

Fragmented markets

Share buybacks

Bear points

Cyclical

Capital intensive

The vast majority of earnings come from the US, which accounted for 86 per cent of group revenue and 90 per cent of underlying cash profits (Ebitda) in the six months to 31 October 2019. Such high exposure means Ashtead is essentially a bet on the health of the US economy. The group has signalled lower growth in the region than in recent years, but rental revenue from its US Sunbelt division still jumped 15 per cent to $2.1bn (£1.6bn) during the first half, in line with its full-year target of 11-15 per cent and outpacing the wider market. The passing of an infrastructure bill would be a welcome catalyst, but other opportunities are arising as technology companies build more data centres. Morgan Stanley estimates such activity could bring Sunbelt $1bn of revenue.

The US hire market is relatively immature, with rental penetration of 50-55 per cent compared with 75 per cent in the UK. An ongoing shift from equipment ownership to rental is being driven by rising equipment costs and health and safety regulations. The group is aiming to reach over $5bn of turnover from the US by 2021 and a 15 per cent market share in the medium term. Sunbelt currently enjoys a market share of 9 per cent, putting it in second place behind the 14 per cent of leader United Rentals (US:URI). A fragmented market offers consolidation opportunities. For example, last year’s £152m purchase of aerial work platform provider King Equipment increased Sunbelt’s share to 7 per cent in Los Angeles, the second largest US market.

The more mature UK market is seen as “good but not great”, weakened by the uncertain political backdrop. Rental revenue from A-Plant dipped 2 per cent to £187m in the first half of the 2020 financial year, and restructuring saw first-half adjusted operating profit plunge by almost a third to £30m. The business is right-sizing its fleet, disposing of under-utilised and low returning assets. While a small part of the group picture, it would benefit from Brexit clarity boosting industry confidence and the green-lighting of major projects such as HS2. 

Ashtead invested £892m in its rental fleet in the first half of the year, with £584m directed towards new equipment and the rest on maintenance. Some £231m was also spent on 11 bolt-on acquisitions. Excluding almost £1bn in lease liabilities, this contributed to a 17 per cent hike in net debt to £4.2bn, although at 1.9 times cash profits, this is still within the group’s target range of 1.5-2 times. As a capital-intensive business, investing in the fleet when times are good can help offset cyclical pressures when demand for rental assets and disposal prices fall during a downturn. With an average equipment age of 33 months, the group can afford to curtail capital expenditure, age its young fleet and preserve cash flows. This is what happened during the last recession. Reducing growth capex to zero between 2009 and 2011, Sunbelt’s average fleet age increased from 35 to 44 months. Should market conditions deteriorate, Ashtead will benefit from reduced exposure to construction, which was 46 per cent of US business at the end of 2019 versus 55 per cent in 2007.

ASHTEAD (AHT)   
ORD PRICE:2,629pMARKET VALUE:£12bn 
TOUCH:2,628-2,630p12-MONTH HIGH:2,674pLOW: 1,744p
FORWARD DIVIDEND YIELD:1.7%FORWARD PE RATIO:13 
NET ASSET VALUE:631p*NET DEBT:181%** 
Year to 30 AprTurnover (£bn)Pre-tax profit (£bn)**Earnings per share (p)**Dividend per share (p)
20173.190.7910427.5
20183.710.9312833.0
20194.501.1117440.0
2020**5.171.1819242.3
2021**5.421.2520344.8
% change+5+6+6+6
NMS:1,000   
BETA:2.05   
*Includes intangible assets of £1.5bn, or 330p a share
**Includes lease liabilies of £999m
***Berenberg forecasts, adjusted PTP and EPS figures