ii view: amazing Ashtead shares hit new high

This FTSE 100 equipment hire company has raised its full-year sales estimates. We assess prospects.  

First-quarter trading update to 31 July 2021

• Total revenue up 21% to $1.85 billion 
• Rental only revenue up 22% to $1.67 billion 
• Adjusted pre-tax profit up 68% to $437 million
• Net debt down 9.9% to £5.7 billion

Chief executive Brendan Horgan said:

“Our business is performing well in supportive markets with strong momentum.  The benefit we derive from the diversity of our products, services and end markets, our investment in technology and ongoing structural change, enhanced by the environmental and social aspects of ESG, enables the Board to look to the future with confidence and we now expect business performance this year to be ahead of our previous expectations.”

ii round-up:

Equipment hire company Ashtead (LSE:AHT) today raised its annual sales expectations as first-quarter profit beat forecasts, given higher hire charge rates for some in short supply equipment and a rebound from pandemic demand levels.

A near-70% jump in adjusted pre-tax profit to $437 million exceeded analyst estimates by around 10%, with Ashtead raising its full-year revenue growth estimates to between 13% and 16% from a previous 6% to 9%. 

Ashtead shares rallied by around 3% in UK trading, bringing their gain over the last year to about double. Shares for smaller rival Speedy Hire (LSE:SDY) are up around a quarter in that time.

Rental revenue compared to the Covid hit 2020 first quarter was up by 22%, although had also improved by 12% compared to the pre-pandemic first quarter of 2019. 

Under its Sunbelt brand, Ashtead rents out a full range of construction and industrial equipment across a wide variety of applications to a diverse customer base. A one-third jump in US profit again led the way. The US accounts for around four-fifths of overall group sales. 

Group investment in the business jumped to $551 million in the quarter compared to $122 million in Q1 2020 as management confidence in the outlook recovered. Guidance for full-year capital expenditure was raised to between $2 billion and $2.3 billion from $1.9 billion to $2.2 billion previously. 

A total of $123 million was spent on bolt-on acquisitions compared to nothing in the comparable Covid hit 2020 quarter.

Given higher full-year management expectations, broker Morgan Stanley now expects full-year 2022 pre-tax-profit to move around 6% higher to $1.71 billion from the previous consensus of $1.62 billion. 

ii view:

Ashtead employs over 18,500 people across more than 1,100 outlets. That’s up from 14,000 staff and just over 800 outlets back in 2017. Its biggest market remains the USA. As such, it has now switched to report its results and dividend payments in US dollars from the UK pound. The UK and Canada make up the balance of its sales at around a tenth each. 

For investors, outlook uncertainty regarding the pandemic cannot be completely dismissed. A 2% fall in adjusted pre-tax profit during it last financial year to the end of April 2021 is a reminder that Ashtead is vulnerable to operating disruption. A price to net asset value ratio of eight times compares to a three-year average of under four times, suggesting the shares are not obviously cheap.  

But rental penetration remains lower in its key US market than elsewhere, and Ashtead, as emphasised by management, continues to outperform rivals, taking market share. Planned infrastructure spending by the US government should help underpin prospects and the dividend payment which, although not sizeable in yield terms, has grown consecutively for the last 15 years. In all, and with the current all-time high in the share price offering some caution, optimism in its long-term prospects is likely to remain undiminished. 

Positives: 

• Market share in many US regions still has room to grow
• Progressive dividend payment 

Negatives:

• Covid clouded outlook
• High dependency on US business 

The average rating of stock market analysts:

Strong hold