ii view: Ashtead shares rally despite warning on profit

Sales in its key US market are down and share buybacks suspended, but the shares are popular again.

Covid-19 trading update

• Expecting profit for the current financial year of £1.05 billion
• Suspending all current and prospective Merger and Acquisition (M&A) activity
• Reducing capital expenditure for the next financial year

Chief executive Brendan Horgan said:

"We are grateful for and extraordinarily proud of our team members who continue to respond as essential service providers during a time when our communities are in need.  All levels of the organisation have quickly adapted our operations to continue servicing our customers while keeping our leading value of safety at the forefront of all we do.

"Looking forward, I am certain the swift actions we took during these unprecedented times and the strength of our balance sheet will serve the Group well.  These factors, when combined with the diversity of our products and end markets, contribute to the strength of our long-term business model and put the Board in a position of confidence to look to the coming financial year as one of strong cash generation and strengthening our market position."

ii round-up:

Equipment hire company Ashtead (LSE:AHT) today warned that due to the corona crisis, profit for the current financial year would come in below that achieved last year. 

Ashtead, which generates around 85% of its sales in the US through its Sunbelt business, now expects underlying pre-tax profit of £1.05 billion, down from last year’s £1.11 billion. 

Its shares rose by more than 5% in early UK trading, although are down by 20% year-to-date – broadly in line with rivals such as Speedy Hire (LSE:SDY) and Vp (LSE:SDY). 

Despite an uptick in speciality equipment hire to support the medical world, food services and utility companies, an 18% fall in US general tool hire meant that overall US rental-only April sales fell by 15%.   

Measures being taken to battle Covid-19 and conserve cash include reducing planned capital expenditure next year to £500 million from between £1.1 to £1.3 billion and suspending both its share buyback and M&A programmes. 

Ashtead has also accessed an additional $500 million (£400 million) debt facility bring its availability of funds to $2.1 billion (£1.7 billion). 

Under various Covid-19 shutdown scenarios run by management, the group would remain free cash positive throughout the next financial year, with its financial position summarising as “strong” by the company itself. 

ii view:

Employing over 19,000 people, Ashtead rents a full range of construction and industrial equipment across a wide variety of applications to a diverse customer base. Its Sunbelt business in the US employs the majority of staff across more than 800 locations. Next comes its UK A-Plant business with around 190 locations and generating just over a tenth of sales. Its Canadian Sunbelt division is the smallest, accounting for just under 5% of sales across 77 outlets.   

Prior to Covid-19, Ashtead's North America business had continued to perform well, given supportive end markets. In the UK, strategic action had begun to refocus the business given challenging market conditions.  

For investors, both a strong record of operational execution and 13 years of consecutive dividend growth are not to be forgotten. But Covid-19 brings serious challenges. Profits are now expected to fall year-over-year with the share buyback scheme now halted. In all, while Ashtead’s long-term record remains unblemished, some added near-term caution appears sensible. 

Positives: 

• Market share in many US regions still has room to grow
• Shareholder returns a focus

Negatives:

• High dependency on US business 
• The UK market remains competitive – nine-month revenue fell by 1%

The average rating of stock market analysts:

Buy