Ride Speedy's upgrade momentum

The impact of efficiency improvements at Speedy Hire has supercharged profits and prompted forecast upgrades (see chart), helped by the company's large fixed cost base (hire equipment and stores), which means improved sales and margins can result in very large increases in profits – so-called operational gearing.

A major reason for the group’s strong recent performance is improved fleet management. Equipment hire accounts for around 60 per cent of Speedy’s business, but until a major investment in fleet monitoring systems the company had been operating in the dark. Vastly improved data gathering on equipment usage has allowed the company to sell off underused kit while investing in equipment that is in high demand. The result in the year to the end of March 2018, was an increase in revenue despite a 2.2 per cent decline in the net book value of the hire fleet.

The impact on profit has been even more significant thanks to the increase in the amount of time equipment has spent out on hire. The utilisation rate rose to 55.4 per cent of total book value during the 2018 financial year, up from 51.5 per cent in 2017, and just 44.0 per cent the year before. Meanwhile, average age of equipment has decreased to 3.8 years from 4.2 previously. The company hopes investment to improve customer service will continue to boost utilisation, and initiatives on this front include ongoing enhancements to Speedy's mobile app and the roll-out of same-day delivery nationally.

Selling underused equipment means that despite the capital-intensive nature of hire businesses, a substantial increase in profits has been achieved while net debt has fallen. Indeed, despite spending £21.3m on two powered-access businesses last year, net debt fell by £2m over the 12 months to the end of March, to £69.4m.

The strong balance sheet means there is scope for further earnings-boosting acquisitions and the company's focus for deals is now on services businesses. Services, such as testing, inspection and training, account for two-fifths of sales and make up most of the activities of Speedy's small Middle Eastern business. This operation requires less capital than the hire business, which means growing the proportion of profit the group generates from services should help Speedy move towards its target of a 15 per cent ROCE. Last year ROCE jumped from 7.7 per cent to 11.5 per cent, which took it past the significant milestone of being ahead of Speedy's weighted average cost of capital (WACC) – ie, for the first time in many years, Speedy is actually creating value rather than destroying it.