ii view: North America remains strong at Ashtead

Rental equipment group Ashtead stays confident for the future, but the UK proves a drag.

First-half results to 31 October 2019

• Revenue up 19% to £2.68 billion
• Operating profit up 8% to £771 million
• Interim dividend up 10% to 7.15p per share
• Net debt up 45% to £5.24 billion from 2018

Chief executive Brendan Horgan said:

“Our North American end markets remain strong and we continue to execute well on our strategy of organic growth supplemented by targeted bolt-on acquisitions.  In contrast, the UK market remains challenging and we are therefore refocusing A-Plant on leveraging its platform to deliver long-term sustainable results, while generating strong cash flow.

“We invested £1 billion in capital and a further £231 million on bolt-on acquisitions in the period, which added 50 locations across the group.  This investment reflects the structural growth opportunity that we continue to see in the business as we broaden our product offering, geographic reach and end markets, thus increasing market share and diversifying our business.

“We remain focused on responsible growth.  Our increasing scale and strong margins are delivering good earnings growth and significant free cash flow generation.  This provides significant operational and financial flexibility, enabling us to invest in the long-term structural growth opportunity and enhance returns to shareholders, while maintaining leverage within our target range of 1.5 to 2.0 times net debt to EBITDA excluding International Financial Reporting Standard (IFRS) 16.

“Except for the UK and a currency headwind, we expect results to be in line with our expectations and the Board continues to look to the medium term with confidence."

ii round-up:

Ashtead Group (LSE:AHT) is an equipment rental hire company which trades under the Sunbelt brand in North America and A-Plant in the UK.  

Employing over 18,000 people, Ashtead rents a full range of construction and industrial equipment across a wide variety of applications to a diverse customer base.

The USA generates the vast majority of group sales at around 86%, followed by the UK and then Canada. 

For a round-up of these half-year results, please click here. 

ii view:

The group’s core US business continues to report broad progress, despite some slowing in growth given prior year boosts from hurricane related activity. Higher group debt following fleet investments, bolt-on acquisitions and the adoption of IFRS 16 have raised concerns for the impact any potential US downturn could have. 

More current, UK business weakness persists. Operating profit margin fell to 11.7% from 17.7%, with the return on investment falling to 7% from 10% in 2018. Accompanying management outlook comments added to the UK caution. 

Ashtead is a great British business doing very well in Trump's America where the company makes most of its money. The shares have done incredibly well over the past few years, so it's unsurprising to see the price fall whenever the market has concerns – this time it's about the much smaller UK operation. Slower economic growth hurts Ashtead, true, but consensus opinion now is that a recession is much less likely in 2020, a US presidential year. In that case, it would not be a surprise to see buying interest follow any significant share price decline, especially as a forward price/earnings ratio of around 11 looks undemanding.

Positives: 

• Sales in its key US market rose 15%
• Shareholder returns remain a focus - £500 million share buyback programme

Negatives:

• High dependency on US business 
• The UK market remains competitive – revenue fell by 2%

The average rating of stock market analysts:

Strong buy