ii view: rentals giant Ashtead pleases City fan club

Covid-19 has hit profit but hires to hospitals have helped and construction activity is improving. 

First-quarter results to 31 July 2020

• Rental only revenue down 8% to £1.08 billion 
• Pre-tax profit down 35% to £208 million
• Net debt down 7% to £4.82 billion

Guidance:

• Expect full-year group rental revenue to be down mid to high single digits
• Expects full-year free cash flow in excess of £1 billion

Chief executive Brendan Horgan said:

"In these challenging markets, the Group delivered a strong quarter with rental revenue down only 8% at constant exchange rates.  This resilient performance illustrates the successful execution of our long-term strategy, which we embarked upon after the last recession, to broaden and diversify our end markets and strengthen our balance sheet.

"Looking forward, the strength of our business model and balance sheet positions the Group well in these more uncertain markets."

ii round-up:

Equipment hire company Ashtead Group (LSE:AHT) today reported a 35% fall in first-quarter profit, hit by stoppages and disruption caused by Covid-19 across the construction industry. 

In the US, which accounts for nearly 90% of total sales, general tool rental fell by almost a tenth, while operating profit slumped by over a quarter as Ashtead retained staff and declined government assistance through the pandemic. 

Ashtead shares were up 2% in UK trading with the results proving marginally better than estimates at broker Morgan Stanley. Its shares for the year-to-date are up by just over 10%. Shares for smaller rival Speedy Hire (LSE:SDY) are down by almost a third in 2020. 

Specialty equipment rentals in the US, excluding oil & gas, rose by 6%. Both the government and private sector looked to hire additional vital equipment to help aid emergency services, hospitals, alternative care facilities and testing sites.

Rental-only sales in the UK fell by 9%. An ongoing restructuring scheme further hit profits along with Covid-19 disruption. Its smallest Canadian business remains in a growth phrase, completing an acquisition during the period. All its businesses across the US, UK and Canada, now all under the Sunbelt Rentals brand, have been designated as an essential by governments during the pandemic.

Activity levels increased consistently through the quarter as lockdowns have eased. Allowing for some positive impact from Hurricane Laura, US August billings on a per day basis were down 3% year-over-year. 

Accompanying management full-year forecasts point towards a mid- to high-single-digit retreat in total rental revenue, potentially better than the 8% endured in this first quarter. 

ii view:

Ashtead is an equipment rental hire company which trades under the Sunbelt brand in the US, Canada and now the UK. Employing over 18,000 people, it 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 over 85%, followed by the UK and then Canada. 

Prior to Covid-19, its North America business had continued to perform well, given supportive end markets. In the UK, it has commenced project unify with the objective of improving operational efficiency and returns.

For investors, management outlook comments and guidance came cloaked in caution given the potential for a second virus spike. But both the diversity of equipment offered, and relative resilience displayed provide some reassurance. Broker Morgan Stanley highlighted an inferior recent performance at US rival United Rentals (NYSE:URI). Expected cash generation of over £1 billion and 14 years of consecutive dividend increases are also not to be overlooked. In all, while some caution looks sensible, long-term investors are likely to take confidence from this latest update.   

Positives: 

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

Negatives:

• High dependency on US business 
• Accounting changes saw net debt up 43% over the last financial year

The average rating of stock market analysts:

Buy