- First-half pre-tax profit surges 87 per cent to £14.3mn
- 40 per cent organic revenue growth
- Underlying EPS up 71 per cent to 14.2p
- Trading comfortably above full-year earnings expectations
Leading subsea rentals and services group Ashtead Technology (AT.:408p) has delivered yet another set of eye-catching results that prompted another round of earnings upgrades. The independent company supports the installation, inspection, maintenance and repair (IMR), and decommissioning of infrastructure across the offshore energy industry.
Increased activity offshore and the emergence of the energy trilemma, a three-way push-pull of energy security, affordability and sustainability, are playing firmly to Ashtead’s strengths. First-half revenue increased 57 per cent to a record £49.8mn, buoyed by 74 per cent growth in offshore renewable revenue (accounting for a third of the total) and 50 per cent higher offshore oil and gas revenue (two-thirds of group revenue).
The European operation was a stand-out performer, delivering 90 per cent revenue growth year on year, albeit this was partly driven by 38 per cent organic revenue growth from two complementary acquisitions made last year: WeSubsea, a provider of high-performance dredge systems; and Hiretech, a specialist in marina and subsea equipment rental assets. Energy consultancy group Rystad forecasts a 16 per cent compound annual growth rate (CAGR) from the region from 2022 to 2025, highlighting the strong market dynamics and structural growth prospects.
The same is true in the Americas and Middle East regions, which delivered 40 per cent and 18 per cent revenue growth, respectively, hence why quoting activity across the group is more than 50 per cent higher year-on-year. So, to secure more equipment to meet the rising end-market demand, the board invested £7.7mn in the fleet in the first half and is budgeting for total capital expenditure of £20mn for the full year. Although net debt increased 25 per cent to £26.4mn, the group leverage ratio fell from one to 0.7 times trailing 12-month cash profit as profit growth continues to outpace the growth in borrowings.
Operationally geared for ongoing outperformance
Importantly, the combination of tight market conditions and a higher proportion of growth coming from customers renting equipment is enabling Ashtead to boost utilisation rates and push through price rises to mitigate the impact of inflationary pressures. It is improving profitability, too, as highlighted by the five percentage point increase in gross margin to 78.8 per cent.
A rising gross margin on bumper revenue growth meant that the £16mn increase in gross profit to £39.3mn was more than double the £6.9mn rise in first-half administration costs, hence the explosive 87 per cent growth in group pre-tax profit to £14.3mn. It also explains why Ashtead’s return on invested capital (ROIC) increased from 19.1 to 25.5 per cent.
House broker Numis Securities has repeatedly upgraded its earnings estimates since I initiated coverage on the shares at 257p (‘Alpha Research: Profit from the great energy reset’, 9 September 2022), pushing through its last upgrades when I reiterated that buy call, at 360p (‘Another round of earnings upgrades’, 3 May 2023). It has done so again, upgrading its 2023 earnings per share (EPS) forecast by 9 per cent to 28.3p, up 46 per cent on 2022, and implying the shares are rated on a price/earnings (PE) ratio of 14. Reflecting the latest upgrades, I am raising my target price from 425p to 475p, in line with Numis’ new target. Buy.
■ Simon Thompson's latest book Successful Stock Picking Strategies and his previous book Stock Picking for Profit can be purchased online at www.ypdbooks.com at £16.95 each plus P&P of £3.75, or £25 plus P&P of £5.75 for both books.
