Second-quarter growth disappoints at Ashtead

Tool hire group Ashtead (AHT) has an enviable track record of earnings upgrades. The market did not react well, therefore, when it downgraded its full-year expectations last month. Management said a lack of hurricanes and wildfires, combined with the Hollywood writers’ and actors’ strikes, had impacted demand, but stressed that its end markets were still robust.

Ashtead’s half-year results reflect some of the headwinds it identified. Revenue growth was strong at 16 per cent, and adjusted operating profit rose by 12 per cent to $799mn (£633mn). However, the Canadian business – which supplies equipment for the film and television industry – saw operating profits fall by 15 per cent in the period to $59.7mn. Meanwhile, profit growth across the group slowed significantly in the second quarter to just 7 per cent.

Concerns about demand have coincided with a big spending push, as the group ploughs money into rental equipment and new sites. $2.5bn of capital was invested in the business in the six months to 31 October, compared with $1.7bn in the same period last year. Meanwhile, $705mn was spent on bolt-on acquisitions, compared with $609mn in the same period last year. 

This resulted in a $355mn free cash outflow, compared with an inflow of $154mn in 2022, and caused net debt to shoot up by more than a quarter to $10.6bn. Ashtead’s ratio of net debt to Ebitda now sits at 1.8 times (excluding lease liabilities) compared with 1.6 times in October 2022. All these borrowings are weighing on the group’s profit before tax, with financing costs leaping from $87mn to $134mn in the period. 

It’s no surprise that investors are feeling nervous, therefore. However, Ashtead stressed that demand in North America (by far its biggest market) was robust, supported by a rise in “mega projects” and the Inflation Reduction Act. Meanwhile, management still expects double-digit sales growth and positive free cash flow for the full year. 

It is very possible, therefore, that the blip in the second quarter was a genuine one-off. And after recent share price falls, Ashtead’s valuation is also looking tempting: its forward price/earnings ratio is now just 14 compared with a five-year average of 17. We remain on the sidelines until there is a bit more visibility, however. Hold. 

Last IC View: Hold, 5,381p, 13 Jun 2023