ii view: Ashtead held back by Canadian film industry

Third-quarter trading update to 31 January

• Rental revenues up 1% to $2.38 billion
• Adjusted profit (EBITDA) up 1% to $1.18 billion
• Net debt of $10.6 billion, down from $10.95 billion in late October

Chief executive Brendan Horgan said:

“The business is focused on executing against the five actionable components of our Sunbelt 4.0 strategic growth plan: Customer; Growth; Performance; Sustainability and Investment. 

“We are in a position of strength, with the operational flexibility and financial capacity to take advantage of the ongoing structural growth opportunities we see for the business and enhance returns to shareholders as we follow our Sunbelt 4.0 plan.”

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ii round-up:

Rental equipment hire company Ashtead Group (LSE:AHT) today detailed results broadly matching City forecasts, although it did reduce forecasts for sales in Canada.

Third-quarter rental sales to late January rose 1% to $2.38 billion, driving adjusted profit (EBITDA) up 1% to $1.18 billion. Ashtead, which is in the process of moving its primary stock market listing to the US, now expects revenue in Canada to grow between 9% and 13% in the year to April, down from a previous estimate of 15-19%. That comes as film industry demand in Canada has failed to recovery to levels seen before the previous writers and actors strike. 

Shares in the FTSE 100 company fell 8% in UK trading having come into this latest news down 16% over the last year. That’s similar to North American rival United Rentals Inc (NYSE:URI) and in contrast to a 15% gain for the FTSE 100 index over that time. 

Ashtead rents out a full range of construction, industrial, lighting and emergency power generating equipment via its Sunbelt brand in the US, Canada and UK.

Management flagged that demand strength for mega projects and hurricane response efforts across North America continues to more than offset reduced local level construction activity.

Ashtead continues to expect annual rental revenue growth of 3-5%, although that’s down from an estimate of 5- 8% nearer the start of the financial year. 

The City currently forecasts adjusted profit for the year to April 2025 of $5.03 billion, potentially up from last year’s $4.89 billion. 

Broker Morgan Stanley reiterated its ‘overweight’ stance on the shares post the update. A fourth-quarter and full-year trading update is scheduled for 17 June. 

ii view:

Founded in Ashtead, Surrey in 1947, the company today rents out more than 1 million items of equipment to over 900,000 different customers. Its equipment to hire includes aerial platforms, air compressors, heaters, lighting, water pumps and crowd control barriers. The US generated most sales over its last financial year at 86%, followed by the UK at 8% and Canada the balance of 6%. 

For investors, events outside of management’s control such as strikes and customer bankruptcies warrant consideration. Exposure to the cyclical construction industry previously resulted in management downgrading forecasts. Group net debt of $10.6 billion and related finance costs should not be forgotten, while President Trump could potentially reduce spending on infrastructure or mega projects in order to lower historically high US government debt.  

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More favourably, US mega projects and disaster recovery continue to support demand. Further cuts in US interest rates are predicted, potentially helping revive local construction spending. Bolt-on acquisitions remain a feature, with 26 totalling $905 million made over its last financial year, while the dividend payment has been increased for more than 15 consecutive years, leaving the shares on a forecast dividend yield of around 1.7%. 

For now, exposure to cyclical construction activity generates some caution. That said, Ashtead’s track record for long term growth and a consensus analyst fair value estimate above £61 per share, look to provide reasons for cautious optimism.  

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