ii view: Ashtead shares slump after downgrade and US listing plan

Second-quarter trading update to 31 October

• Rental revenues up 5% to $2.73 billion
• Adjusted pre-tax profit down 2% to $682 million
• Interim dividend of 36 US cents per share
• New share buyback of up to $1.5 billion over the next 18 months
• Net debt of $10.95 billion, up from $10.64 billion

Guidance:

• Now expects full-year rental revenue growth of 3% to 5%, down from a previous 5% to 8%
• Now expects full-year US rental revenue growth of 2% to 4%, down from a previous 4% to 7%
• Now expects full-year capital expenditure of between $2.5 to $2.7 billion, down from $3 to $3.3 billion
• Now expects full-year free cashflow of $1.4 billion, up from a previous $1.2 billion

Chief executive Brendan Horgan said:

“We launched our Sunbelt 4.0 strategic growth plan in April and the business is focused on executing against our five actionable components: Customer, Growth, Performance, Sustainability and Investment.

“The investments in and expansion of the business over Sunbelt 3.0 and into Sunbelt 4.0 are enabling us to take advantage of the diverse opportunities that we see while maintaining discipline and balance sheet strength that affords us considerable flexibility and optionality.

“We remain in a position of strength, with the operational flexibility and financial capacity to capitalise on the ongoing structural growth opportunities we see for the business and enhance returns to shareholders as we follow our Sunbelt 4.0 plan and the Board looks to the future with confidence.”

• Invest with ii: Top UK Shares | Free Regular Investing | Open an investment Account

ii round-up:

Rental equipment company Ashtead Group (LSE:AHT) today proposed a possible move in its primary stock market listing to the USA, and lowered full-year profit guidance given weak local construction activity.

Following consultation, shareholders will be asked to vote on a change in Ashtead’s main market listing, with a potential move to North America aligning it with 98% of operating profit made over the last financial year. The City now expects annual profit of around $2.1 billion, down from a previous $2.27 billion. 

Shares in the FTSE 100 company fell 12% in UK trading having come into this latest news up 15% year-to-date. That’s ahead of a 7% gain for the FTSE 100 index in 2024. Smaller hire firm Speedy Hire (LSE:SDY) is down 4% year-to-date. 

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

Despite demand for equipment to aid mega projects such as renewing roads and hurricane recovery, weak local construction activity amid high interest rates now sees management reduce US revenue growth forecasts for 2025.  

As such, it now expects group-wide full-year revenue growth of between 3% and 5%, down from a previous 5% to 8%. 

Lower activity levels will reduce full-year capital expenditure on items such as new branch outlets to $2.5-2.7 billion versus $3-3.3 billion previously.

Reduced annual expenditure boosts expected annual free cashflow to $1.4 billion, up from a $1.2 billion and underpinning a new share buyback of up to $1.5 billion over the next 18 months.

A rebalancing of the dividend between interim and final results sees a half-year payout of 36 US cents per share, up from 15.75 cents a year ago. 

A proposed move to a primary US stock market listing would still see its UK stock market listing retained in the International Companies area. 

Broker Morgan Stanley reiterated its ‘overweight’ stance on the shares, flagging a target price of £70 per share. 

ii view:

Started in Ashtead, Surrey, the group 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 USA operates most of its rental stores at over 1,215, with UK branches of around 190 and Canada approximately 135. 

For investors, exposure to the cyclical construction industry has seen growth forecasts lowered. The frequency and strength of natural events like hurricanes and wildfires also provides volatile demand. Events outside of management’s control such as customer bankruptcies and strikes recently impacting the film industry warrant consideration. So do heightened borrowing costs given group net debt of over $10.5 billion, while President elect Trump could potentially reduce spending on infrastructure or mega projects in order to lower historically high US government debt.  

• Sign up to our free newsletter for investment ideas, latest news and award-winning analysis
• Shares for the future: a high-profile firm worth your vote?
• Run your winners or take profits? How the pros decide

To the upside, US mega projects and disaster recovery continue to support demand. Further cuts in US interest rates are expected, potentially helping to revive local construction spending. Bolt-on acquisitions remain ongoing with 26 made worth $905 million 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 1.4%. 

In all, weak local construction activity clearly warrants some caution. That said, Ashtead’s track record for growth over the long term should not be overlooked, with this well managed company likely to remain an interesting long-term investment.   

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