ii view: Ashtead reports return to rental growth

Record free cashflow, the dividend up and net debt down. Buy, sell or hold?

Fourth-quarter and full-year results to 30 April 2021

• Fourth quarter rental only revenue up 15% to £1.09 billion 
• Full-year adjusted pre-tax profit down 2% to £998 million
• Final dividend of 35p per share
• Total dividend for the year up 3.7% to 42.15p per share
• Full-year net debt down 22% to £4.19 billion

Chief executive Brendan Horgan said:

“Our performance this year illustrates the benefits of our long-term strategy to broaden and diversify our end markets and strengthen our balance sheet.  This has enabled us to capitalise on our increasing scale while, at the same time, maintaining the business' agility.  The last year has proven the strength in our business model during a difficult period in the economic cycle.”

“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."

ii round-up:

Equipment hire company Ashtead Group (LSE:AHT) today reported a return to rental revenue growth as customer demand during the pandemic continued to improve.

Rental revenue in the fourth quarter to the end of April rose by 15% to £1.09 billion, up from a decline of 1% over the previous quarter. Adjusted pre-tax profit for the Covid marred year fell by just 2% to £998 million, with the total dividend for the year up 3.7% to 42.15p per share.

Ashtead shares recovered from an initial dip in UK trading to continue their attack at a record high. They have risen by more than 275% since pandemic induced market lows in March 2020. Shares for smaller rival Speedy Hire (LSE:SDY) are up around 60% over the same time. 

Reduced capital expenditure and costs helped the predominately US facing Ashtead generate record free cash flow of £1.38 billion, enabling a near one-quarter fall in group net debt to £4.19 billion. 

Within the overall performance, its general tool hire business was 4% lower than last year, although up 7% in the fourth quarter, while its specialty businesses benefited from a broad range of products and end markets, growing rental only sales by 13%. 

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.

Accompanying management outlook comments pointed to clear momentum going into the new financial year, with strong positions in all its markets supported by a high-quality fleet and a strong financial position.

With the USA its key market and the company generating 90% of its operating profit in US dollars, Ashtead will from now on report its results and dividend payments in US dollars. 

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 in 2017. Its biggest market, the USA, generated just over 80% of rental revenue in this latest quarter, with the UK accounting for just over 12% and Canada making up the balance. 

For investors, outlook uncertainty regarding the pandemic cannot be completely dismissed, while a 2% fall in adjusted pre-tax profit is a reminder that Ashtead is vulnerable to operating disruption. A price-to-net asset value ratio of over seven times compares to a three-year average of almost 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 also help underpin prospects, while the dividend payment, although not sizeable in yield terms, continues to grow. In all, and while recent upside in the share price offers some caution, there looks to be little in these latest results to dent confidence in the long term. 

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:

Buy