ii view: slow growth at Ashtead hurts share price

Fourth-quarter trading update to 30 April

• Revenues up 7% to $2.63 billion
• Adjusted pre-tax profit down 2% to $2.23 billion
• Net debt of $10.65 billion, up from $8.96 billion a year ago
• Final dividend of 89.25 US cents per share
• Total dividend for the year up 5% to 105 cents per share

Guidance:

• Expects rental revenues for the year ahead to grow by between 5% and 8%
• Now expects adjusted pre-tax profit for the year ahead of $2.25-2.3 billion, down from a previous $2.3-2.4 billion

Chief executive Brendan Horgan said:

“We are in a position of strength, with the operational flexibility and financial capacity to capitalise on the opportunities arising from these market conditions and ongoing structural changes. We will drive long-term sustainable growth and returns for all stakeholders and the Board looks to the future with confidence."

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ii round-up:

Equipment hire company Ashtead Group (LSE:AHT) today detailed slower quarterly revenue growth impacted by both softer demand and a customer bankruptcy.

Fourth-quarter revenue of $2.63 billion improved 7% year-over-year, but was down on growth of 9% in the previous third quarter and an increase of 16% during the first half. Adjusted pre-tax profit for the full year to late April broadly met City forecasts, dropping 2% from $2.23 billion a year ago, hindered by higher borrowing costs. Group forecasts for adjusted profit for the year ahead have reduced by 3% to $2.3 billion

Shares in the FTSE 100 company fell 4% in UK trading having come into this latest news little changed year-to-date. That’s ahead of a 6% retreat for smaller rival Speedy Hire (LSE:SDY) over that time. The FTSE 100 index is up almost 6% so far in 2024. 

Ashtead rents a full range of construction, industrial, lighting and emergency power generating equipment, with over four-fifths of its sales coming from the USA. 

US rental revenue of $1.98 billion for the fourth quarter fell from $2.04 billion in the third quarter, with the adjusted profit margin of 47.3% down from 48.1% in the year ago quarter, which factors in the bankruptcy of a scaffolding customer.    

A final dividend of 89.25 US cents per share takes the total payment for the year up 5% to 105 cents. 

A total of 26 bolt-on acquisitions during the full year at a cost of $905 million was lower than the previous year’s spend of $1.1 billion. 

Group net debt of $10.65 billion was up from $8.96 billion a year ago, although the ratio of net debt to adjusted profit (EBITDA) remained within management’s comfort range, rising to 1.7 times from the prior year’s 1.6 times. 

Broker Morgan Stanley reiterated its ‘overweight’ stance post the update, flagging a price target of £63 per share. First-quarter results are scheduled for 3 September. 

ii view:

Founded in Ashtead, Surrey, this FTSE 100 company today rents out more than 1 million items to over 800,000 different customers. Its equipment to hire includes aerial platforms, air compressors, heaters, lighting, and water pumps. Geographically, the US generated its biggest chunk of profit during this latest fiscal year at 94%, followed by Canada at 3.5% and the UK 2.5%.

For investors, the frequency and strength of natural events such as hurricanes and wildfires and the volatile impact created on demand hire cannot be overlooked. Events outside of management’s control such as customer bankruptcies and strikes warrant consideration. So do higher borrowing costs given group net debt of over $10.5 billion. Finally, potential changes in US government and possible cuts in infrastructure spending given historically high US government debt, are also potential problem areas. 

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On the upside, Ashtead's core US market continues to be referred to by management as ‘robust’, with sales supported by an increasing number of mega projects and previous government law bills. Bolt-on acquisitions have helped the company increase its location diversity, costs remain a focus, while the dividend payment has been increased for more than 15 consecutive years, leaving the shares sat on forecast yield of around 1.5%. 

In all, and while slowing sales growth offers room for caution, fans of this generally well-managed company are likely to sit tight. 

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