Winter star Ashtead punished for profits shortfall

Shares fell 7% on these results, reports our head of markets, but Ashtead typically excels in winter. 

A confluence of concerns has taken the wind out of equipment rental giant Ashtead's (LSE:AHT) sails following this half-year and second-quarter update.

While pre-tax profit is up by 6%, the number is light of expectations. Furthermore, there are wider worries overhanging the stock, not least of which is the company’s reliance on the US part of its business, which accounts for 86% of revenues. 

In addition, the company’s aim to expand by both organic growth but also by acquisitions carries the ongoing possibility of execution risk, even though this is something in which the group is well-versed. 

The other strategic question mark hangs over the net debt figure which has risen due to acquisitions and which currently stands at £5.2 billion, versus a previous figure of £3.6 billion. Given Ashtead’s ability to generate cash and a favourable economic backdrop, the debt is comfortably serviceable, but any decline in either the economy or the rental market, particularly in its major geography, would filter through hard and fast.

Source: TradingView Past performance is not a guide to future performance

Even so, the company is ploughing ahead given the strength of the US economy in particular, even if the UK (9.5% of revenues) is a rather more challenging proposition at the moment. 

Margins are strong across the piece, with the US figure of 52% being accompanied by 33.5% in the UK and 42% in Canada. Group revenues rose 19% in the period, earnings per share added 11% and operating profit spiked by 8%. Underpinning these numbers was a 13% rise in rental revenues, and a capital investment of £1 billion in the business in an effort to accelerate profits in a generally benign environment. 

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The 10% increase in the dividend is a statement of confidence (although the yield of 1.7% is not generous) and the previously announced £500 million buyback programme is supportive to the share price. In all, Ashtead’s fairly aggressive strategy is currently on full tilt and will presumably remain so until the economic clouds darken.

Despite today’s disappointment in the update, which may contain an element of profit-taking, the shares have benefited from Ashtead’s strategic drive. The price has risen 46% over the last year, which compares to a 7.6% hike for the wider FTSE 100 index, and 21% in the last six months alone. 

While the company continues to deliver the goods, it should remain a market favourite, with the general view of the shares as a ‘strong buy’ likely to hold firm.