Ashtead gives investors a lift with strong update Tags

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Ashtead is best known for its earthmovers, small tools and cherry-picker platforms and the equipment rental giant is giving its shareholders a lift with a strong trading update and another upgrade to earnings forecasts from chief executive Brendan Horgan,” says AJ Bell investment director Russ Mould.

“However, the shares are still down by almost a quarter from November’s all-time high – technically bear market territory – and investors are still clearly concerned by the danger posed by surging energy and commodity prices to the economic upcycle in the USA and beyond.

“The Institute for Supply Management’s (ISM) purchasing managers’ index (PMI) for manufacturing in the USA, where Ashtead generates more than 80% of its sales and profits through its Sunbelt operation, is starting to lose altitude to suggest the sugar rush of the fiscal stimulus and additional monetary stimulus applied during the pandemic and lockdowns is wearing off.

Ashtead gives investors a lift with strong update

Source: Refinitiv data

“The good news is that orders are still looking healthy enough, as the ISM’s reading stands way above the 50 mark, to imply that business is still strong. But any slide toward 50, or even below it, could signal a slowdown in the US economy and the main engine of Ashtead’s growth, so that would be a concern, even if the FTSE 100 firm has a track record of gobbling up market share from its rivals. Helped by organic gains and acquisitions, Ashtead’s Sunbelt business now ranks second in the USA, with a market share of 11%, trailing just American rival United Rentals and its 14% slice of the industry.

Ashtead gives investors a lift with strong update

Source: Refinitiv data

“The less good news is that the ISM’s order intake reading peaked in December 2020 and the combination of supply chain dislocation, input cost pressures and now the possible impact of surging energy prices on the economy has investors on edge, especially as Ashtead has been here before.

“The company’s share price plunged during the US recessions of 2001-03 and 2007-09, bottoming below 10p a share in spring 2003 as the toll of the downturn and a stretched balance sheet in the wake of 2000’s £320 million purchase of Rentokil Initial’s US equipment business had investors running for cover.

Ashtead gives investors a lift with strong update

Source: Refinitiv data

“Ashtead made its next big purchase in 2006 when it bought Nations Rental for $1 billion only to walk straight into the next US downturn. Although Ashtead’s shares defied gravity for a while as industrial orders began to weaken right across the spectrum in the US the combination of a downturn and debt told in the end.

Ashtead gives investors a lift with strong update

Source: Refinitiv data

“Ashtead has not made a big purchase during this long upcycle, but it has made many smaller ones. In the fiscal year to April 2022 alone the firm has spent $1.2 billion on over 20 acquisitions, allocated $311 million to share buybacks as part of its $1 billion two-year buyback plan and dished out $213 million in dividends (with more to come).

“Granted, interest cover was six times in the year to April 2021 and profits look set to rise further this year, to create an even bigger buffer, but a downturn could change the picture and leave things looking a little less comfortable, especially as net debt, including leases is some $6.9 billion.

“Investors will therefore be pleased to see growth in both sales and pre-tax profit reaccelerate in the third quarter.

Ashtead gives investors a lift with strong update

Source: Company accounts. Financial year to April.

“And although the base for comparison gets a lot harder from here on, they will also be pleased to see Mr Horgan offer his third upgrade to sales growth and capital investment budgets for the year.

“If management is feeling bullish on the outlook, then it will buy more kit to rent out. Capital investment in the first half soared to $1.2 billion from $438 million (before disposal proceeds) although some equipment arrived more slowly than planned, owing to supply chain disruption. Ashtead has raised its planned budget for capex to $2.4 billion to $2.5 billion from an initial plan for the year of $1.6 billion to $1.8 billion, which hardly suggests that management is seeing anything that concerns them right now.”

  Ashtead management guidance through current fiscal year
  Year-end 2021 Q1 2022 Q2 2022 Q3 2022
Sales growth 6% to 9% 13% to 16% 17% to 20% 19% to 21%
Gross capex $1.6 - $1.8bn $2.0 - $2.3bn $2.2 - $2.4bn $2.4 to $2.5bn
Free cash flow $0.8 - $1.1bn $0.9 - $1.1bn $0.9 - $1.1bn $0.9 to $1.1bn

Source: Company accounts. Financial year to April.

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