Another round of earnings upgrades

Leading subsea rentals and services group Ashtead Technology (AT.:360p) has delivered eye-catching results and 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.

Last year, annual revenue surged 31 per cent to £73.1mn, buoyed by organic growth (23.7 per cent), favourable exchange rates (5.5 per cent) and bolt-on acquisitions (1.7 per cent). Tight market conditions – lead times for new equipment and spares continue to rise – have enabled Ashtead to push through price rises and mitigate the impact of inflationary pressures as more customers are renting equipment. This is allowing the business to raise cost utilisation rates and edge up its gross margin to 74 per cent.

Increased activity offshore and the emergence of the energy trilemma, a three-way push-pull of energy security, affordability and sustainability, are playing to Ashtead’s strengths, too. The revenue contribution from wind generation has more than trebled in the past four years to account for 31 per cent of the total, the segment delivering 22 per cent revenue growth in the latest 12-month trading period.

An eye-catching return on invested capital of 21 per cent, up from 17 per cent in 2021, is indicative of the high returns the group is making. It supports last year’s £13.1mn investment in the equipment rental fleet and the £32.9mn spent on two acquisitions: WeSubsea, a provider of high-performance dredge systems; and Hiretech, a specialist in marina and subsea equipment rental assets.

Both the acquired businesses have been active in offshore renewables and will be able to exploit wider market opportunities with the benefit of Ashtead’s international exposure, both in renewable energy and in their more traditional offshore oil and gas market. There is scope for more acquisitions as closing net debt of £28.7mn equates to only one times last year’s cash profit and a 38 per cent gearing level.

Earnings estimates upgraded again

The combination of strong market conditions, customer backlogs at record levels, rising utilisation rates and pricing underpin yet another year of strong earnings growth, so much so that the directors have raised their guidance yet again. House broker Numis Securities has upgraded its 2023 earnings per share (EPS) forecast by 11 per cent to 26.1p, having previously raised estimates by six per cent in January and nine per cent in October. On this basis, the shares are rated on a forward price/earnings (PE) ratio of 13.8 even though Numis also upgraded 2024 EPS estimates by 14 per cent to 28.5p. The re-rating has further to run.

So, having initiated coverage at 257p (‘Alpha Research: Profit from the great energy reset’, 9 September 2022), and repeated that advice at 311p (‘Exploit profit-taking on this renewable energy stock’, 19 January 2023), I am lifting my target from 375p to 425p, slightly below Numis’ raised target of 450p (from 400p). Buy.

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