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Ashtead ready to benefit from US building boom

The group owns the second-largest equipment hire company in the US and has been growing strongly
May 10, 2018

When times are good for equipment rental companies, they tend to be very good. Strong demand means costly equipment not only spends more time out on hire, but the rates customers are willing to pay also improves. What’s more, strong economic conditions normally mean equipment can be sold on at better second-hand prices when a hire company is done with it. These are the virtuous dynamics that have for several years characterised trading for blue-chip construction-equipment hire company Ashtead (AHT). And the forecast earnings upgrades and share-price performance over the past 12 months (see chart) suggests little sign of this momentum fading.

IC TIP: Buy at 2061p
Tip style
Growth
Risk rating
High
Timescale
Medium Term
Bull points

Share buybacks
Strong earnings forecast growth
US business performing well
Rising free cash flow

Bear points

Capital intensive
Cyclical industry

 

 

With around 87 per cent of Ashtead’s revenue and 92 per cent of profit coming from the US last year, the company has been benefiting from the strong economic conditions across the pond. A structural shift away from equipment ownership and towards rental is also helping. Meanwhile, the policies of the country’s self-proclaim 'builder-in-chief', President Trump, are also a boon. Of particular note are recent tax cuts which should stimulate demand as well as lowering Ashtead’s own cash tax charge from 19 per cent to 8 per cent. Recent dollar strength should help reported numbers, too.

Ashtead is attempting to take advantage of the strong conditions with its ambitious Project 21. The growth plan was launched in 2016 with the aim of increasing US locations from 546 to 900 by 2021 through a combination of bolt-on acquisitions and greenfield developments. At the time of the third-quarter update in April, store numbers were already up to 715 – materially ahead of schedule.

Given the capital-intensive nature of Ashtead's business (it has to own the equipment it hires out) its growth is cash-hungry. Full-year capital expenditure is expected to come in at around £1.2bn and a similar level is expected for 2018-19. Despite the heavy investment, the business became free-cash-flow (FCF) positive last year and broker Numis expects a compound annual FCF growth rate of about a fifth over the next two years, taking FCF to £456m in 2019.

This means the group should be able to continue to keep net debt to cash profits in the target range of 1.5 to two times (it was 1.6 times at the end of January) while making generous returns to shareholders – management plans to buy back £500m-£1bn over the next 18 months. This is quite the sign of confidence given the group’s high levels of capital expenditure. A recent £816,000 share sale by Ashtead's chairman of about a third of his holding is worth seeing in light of his impending retirement.

ASHTEAD (AHT)   
ORD PRICE:2,061pMARKET VALUE:£10.1bn
TOUCH:2,061-2,062p12-MONTH HIGH:2,185pLOW: 1,476p
FORWARD DIVIDEND YIELD:1.6%FORWARD PE RATIO:13
NET ASSET VALUE:497p*NET DEBT:105%
Year to 31 AprTurnover (£bn)Pre-tax profit (£bn)**Earnings per share (p)**Dividend per share (p)
20152.040.4962.615.3
20162.550.6585.122.5
20173.190.7910427.5
2018**3.690.9413431.0
2019**3.911.0315734.0
% change+6+10+17+10
Normal market size:1,000   
Matched bargain trading    
Beta:0.97   

*Includes intangible assets of £1.04bn, or 212p a share

**Numis forecasts, adjusted PTP and EPS figures