Interactive Investor

Ashtead results spark upgrades

3rd March 2015 12:37

Harriet Mann from interactive investor

Cramming significant on-site growth and M&A into the last nine months, Ashtead now expects full-year results to beat already increased guidance. The news triggered upgrades across the City, but while the equipment rental firm is certainly not cheap, the cycle is incomplete and market demand should remain strong for at least another 2-3 years.

Group rental revenue jumped 24% during the nine months to 31 January, helping generate record underlying pre-tax profit of £379 million. Both Ashtead's US and UK operations contributed, with a mix of same-store growth and 15 bolt-on acquisitions worth £162 million made during the period.

After capital expenditure of £783 million so far this financial year, bosses warn that full-year spend could be higher than the previously announced range of £925-975million. But investors can see immediate benefits, with full-year results expected to come in ahead of already improved guidance.

Return on investment across the group has risen to 19%. At US business Sunbelt, it remained flat at 26%, and improved at UK business A-Plant to 13%. Rental revenue rose by 25% and 18% respectively, to £1.2 billion and £242.4 million. Margins were up across the group with Sunbelt up to 48% and A-Plant to 35%. It also appears to have avoided any softness as a result of falling oil prices, and management is confident that continued challenges in 2015/2016 will be offset by growth in other markets.

Broker Jefferies says: "With continued Sunbelt market share gain, Ashtead remains in early innings of multi-year period of supernormal growth."

The results highlight that Ashtead can beef up earnings without help from the US construction market, says JP Morgan, which is now starting to pick up. If recovery does take hold, its expectations of double-digit volume growth could seem conservative.

The analyst said: "While we do not anticipate a further material increase in rental penetration in the US, as there tend to be step changes in recessions before flattening off, we believe the group is well placed to outpace the market by taking share from smaller competitors. However, the group is being sensible, in our view, with regards to the level of debt that it is willing to take on in this cycle with net debt/EBITDA of 2.0x at FY15E, despite big increases in capex spend."

But they warn that after its strong share price performance, any diluted optimism could be taken badly by the market. At 1,178p, the shares are up 13% since being included in Interactive Investor's Winter Portfolio of seasonal outperformers, and currently trade on almost 20 times earnings.

As you can see from the chart (above), Ashtead is hugging all-time highs and has strayed further from the 200-day moving average. However, pencilling in three-year compound annual EPS growth of 24%, Barclays is clearly confident and has upped its price target to 1,289p.

"Ashtead has delivered strong earnings upgrades driven largely by structural growth and self-help," says the broker. "With the cyclical recovery now coming through, we believe there is scope for further strong EBITDA growth and that the rating can be sustained over the next 12 months given the current stage of the cycle."

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. 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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