Speedy Hire gathers pace

Speedy counts 85 of the UK’s top 100 contractors as customers, but Carillion’s collapse revealed the danger of over-exposure to large customers. Focus has shifted to expanding its higher margin small- and medium-sized enterprise (SME) customer base. SMEs now account for almost a fifth of hire revenue, but the market share amongst these customers is still lower than for the wider construction rental market, indicating growth potential. It appears that SMEs are weathering the challenging trading conditions better than larger peers. The first half of the year saw domestic hire revenue increase by just 0.9 per cent amid a more competitive rental market, downward pressure on rates and lost sales from Carillion’s liquidation. But like-for-like revenue from SMEs increased by 27 per cent, with better rates lifting the hire gross margin by 0.5 percentage points to 77 per cent.

The current construction downturn could threaten Speedy’s progress. But the industry outlook may take a positive turn if the new government follows through on its infrastructure promises and a clearer Brexit outcome releases pent-up business investment. Despite the precarious backdrop, management anticipates hitting full-year expectations.

Return on capital employed (ROCE) has been building in recent years thanks to improved asset efficiency, market share gains and cost discipline. For the six months to 30 September, ROCE, excluding amortisation and exceptional items, increased by 0.4 percentage points to 12.7 per cent. The year 2018 was the first time in a decade that ROCE exceeded the cost of capital, estimated by the group to be 9.2 per cent. Returns above cost indicate Speedy’s investments are creating value for shareholders. A push into higher-margin, capital-light services should propel ROCE closer to the 15 per cent  target.

Services now account for just over two-fifths of overall sales, reaching £84m in the first half of the year. Representing an increase of 14 per cent, this is in line with the group’s desire to achieve faster revenue growth in services than hire. Half of services revenue is derived from ‘partnered services’ – hiring out third-party equipment not included in the group’s own fleet. But training and testing are key growth areas, benefiting from increasing regulation and cross-selling opportunities to hire customers. Subsidiary Lloyds British is tapping into an equipment testing, certification and inspection market estimated to be worth around £850m. Meanwhile, training group Geason – acquired in December 2018 – saw a fourfold increase in revenue in the first half of the year, helping lift the gross margin by 0.7 percentage points to 55.2 per cent. Co-locating training centres in hire depots should limit overheads.

Reflecting £31m spent on acquisitions and £61m of capital expenditure, net debt increased by almost 30 per cent to £89.4m in 2019. The largest purchase was powered access equipment provider Lifterz, exploiting a health and safety-driven shift towards mobile elevated work platforms. But excluding £75.1m in lease liabilities, net debt dipped to £85.3m in the first half of this year and should reduce further following the sale of surplus land to Bellway Homes for £4m, compared with a £100,000 book value. House broker Liberum is forecasting net debt (excluding lease liabilities) will reach £76m by the 2020 year-end. Equivalent to less than one times forecast cash profits (Ebitda), this is well below the group’s target leverage multiple of 1.5 times.