Interactive Investor

ii view: Hollywood strike triggers Ashtead's profit warning

Shares in this FTSE 100 rental equipment company trading under the Sunbelt brand are now back to where they started the year. We assess prospects.

20th November 2023 11:41

by Keith Bowman from interactive investor

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First-half trading update to 31 October

  • Now expects full-year revenues up between 11% and 13%, down from a previous 13% to 16%
  • Now expects full-year adjusted profit (EBITDA) 2% to 3% below current City forecasts 

ii round-up:

Rental hire company Ashtead Group (LSE:AHT) today warned on full-year profits given both a quieter than normal hurricane season and film and TV industry strikes in Hollywood which lasted longer than expected. 

Annual revenue to the end of April is now expected to rise by up to 13%, down from management’s previous forecast of up to 16%. That takes its estimate of adjusted annual profit below current City forecasts by 2-3%. 

Shares in the FTSE 100 company fell by more than 10% in UK trading having come into this latest news up by a similar amount year-to-date. UK focused Speedy Hire (LSE:SDY) has fallen by close to that amount in 2023, while the FTSE 100 index itself is little changed. 

Ashtead, which trades under the Sunbelt brand, rents a full range of construction and industrial equipment, with over four-fifths of its sales coming from the US. 

Higher borrowing rates take expected net interest costs to $540 million from a previous $500 million, along with an increase in its expected asset value depreciation to $2.12 billion, also weigh on full-year earnings hopes. 

Capital expenditure, such as that on new equipment, is still expected to remain at between $3.9 billion and $4.3 billion, with first-half revenues and adjusted profit still expected to achieve new group records. 

Interim results to the 31 October are scheduled for 5 December. 

ii view:

Founded in Ashtead, Surrey, this FTSE 100 company today rents out more than 900,000 items to over 800,000 different customers. Its equipment to hire includes aerial platforms, air compressors, heaters, lighting, and water pumps. Geographically, the US accounts for most of its sales at around 85%, followed by the UK at just over 8%, and Canada the balance of around 6%. 

For investors, the frequency and strength of natural events such as hurricanes and wildfires on demand cannot be forgotten. Heightened borrowing costs given group net debt of over $9 billion at its late-July first quarter results warrants consideration. So does any potential change of US government and possible cuts in infrastructure project spending given historically high US government debt. 

More favourably, film and TV strike action hindering its performance has now ended. Accompanying long-term management outlook comments point to expected US government spending on mega projects. Bolt-on acquisitions have helped the company increase its location diversity, particularly across the US, while the dividend payment has been increased for more than 15 consecutive years, leaving the shares offering a forecast dividend yield of around 1.5%. 

This cut to profit expectations appears due to tough comparatives and temporary issues, and long-term investors might choose to pick up another FTSE 100 company on the cheap. However, more cautious investors may demand further evidence that all is well.

Positives: 

  • Product and customer diversity 
  • Progressive dividend payment 

Negatives:

  • Tough economic backdrop
  • High dependency on US business 

The average rating of stock market analysts:

Buy

These articles are provided for information purposes only.  Occasionally, an opinion about whether to buy or sell a specific investment may be provided by third parties.  The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.

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