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Ashtead Group: this time it’s different, management tells shareholders


Ashtead (LSE:AHT), the FTSE 100 listed provider of heavy machinery for rental hire, delivered Q4 and full year 2022 results last week. The company, which trades through its Sunbelt Rentals brand, delivered record revenues for the year, with 19% group revenue growth in both its Q4 and full-year results. Strong trading was driven by growth in the North American market, with the US and Canada growing 20% and 26% respectively, offset slightly by 11% growth in the smaller UK market.

Profitability for the group during the year was strong, as EBITDA margins grew by 100 basis points (bps) to 45% and operating profit margins grew 200bps to 26%. The group return on investment was 18%. Strong cash flows during the year allowed for $2.4 billion of capex investment (primarily investment in new equipment to expand the rental fleet), $1.3 billion of bolt-on acquisition investment and $700 million of capital returned to shareholders through dividends and stock buybacks.

Ashtead’s largest market is the United States, which accounts for 81% of group revenues, experienced buoyant performance, as rental revenues leaped 22% during the year. Results in America benefitted from a favourable demand and supply environment in 2022, where the difficulty in sourcing heavy machinery, such as JCB excavators, has led to a boost for access to Ashtead’s rental fleet.

During Ashtead’s Q4 earnings call, management struck a highly positive tone on the backdrop for demand in the US over the coming year and onwards, despite inflation and supply chain uncertainty. A combination of a high level of forecast construction starts and further clarity on the US infrastructure package is set to enhance industrial spending in 2023.

In Canada, Ashtead’s smallest market, rental revenue was 30% higher than a year ago at CAD 569 million. Group-leading levels of growth in Canada reflected in part the depressed comparatives seen during the year. However, management noted the strong performance reflecting an increased maturity of the business and increased feed through of growth from Ashtead’s Canadian specialty businesses.

In the UK, rental revenue was 13% higher than a year ago at £544 million. The UK business has continued to benefit from service contracts, with the Department of Health for the NHS Covid-19 response. Management noted that due to the fact these NHS-related contracts account for 30% of Ashtead UK revenue in 2022, the reduction of this business will result in mid-teens decline for the UK business in the coming year.

Ashtead navigates inflationary environment

During Ashtead’s results presentation, management issued confident commentary on the inflationary environment currently present across all of the company’s markets. Inflation for the group is currently persisting in wages for skilled trades, fuel and transportation in particular.

However, it is important to note that Ashtead attracts revenue by leasing its asset base, which the company has managed to drive significant pricing uplifts for across the year, leading to profit margin improvement.

As has been the case now for several quarters, the supply and demand equation remains incredibly favorable. This dynamic has led to record levels of utilization throughout the business. Further, our industry, like any other, is experiencing inflation, ranging from equipment to goods to services to wages. As I’ve said consistently throughout the year, when you combine the supply and demand circumstances, inflation realities, and your business has a relentless focus on leading — delivering leading services to your customers, you should be able to increase rental rates. We continue to do just that. Our sequential and year-on-year rental rate improvement has been very good, even outpacing our internal ambitious targets we would have shared early in last year.

Brendan Horgan – Ashtead Group CEO

Investment in growth continues for the group

In 2021, Ashtead launched its new corporate initiative ‘Sunbelt 3.0’, which aims at adding 298 new rental locations across North America, bringing Ashtead to a total of 1,234 locations by 2024. In the UK, Ashtead’s focus is to transform the business over the next three years to deliver enhanced and sustainable margins and returns.

During the year, Ashtead added 123 rental locations in North America; 88 of these were Ashtead-developed sites and 35 were derived through acquisitions. With the Sunbelt 3.0 initiative underway, particular focus has been given to driving Ashtead’s speciality business, as the company aims to diversify revenue streams and reduce its dependence on cyclical construction markets.

Ashtead noted two transformational acquisitions during the 2021/2022 period. Firstly, the purchase of Mahaffey, a leading provider of temporary structures and shelter solutions in the US, acquired in December 2021. Mahaffey offers turn-key solutions, from design and engineering, project management to delivery and installation of temporary shelters. Mahaffey serves industries such as aviation, military and government, emergency response, manufacturing and construction.

Secondly, Ashtead purchased ComRent, a market-leading load-banks provider in February 2022. Load banks are used to test the electrical output of an electricity source at full load. Sunbelt now offers the largest fleet of load banks in the industry, which are used by data centres, electrical utilities and renewable energy producers.

Despite deploying $3.7 billion in capex and acquisition spend during the period, Ashtead ended its 2022 financial year with a very comfortable net debt to EBITDA ratio of 1.5x, which sits at the lower end of their 1.5-2.0x target.

Ashtead reassures investors the company has undergone structural change

For some investors, the current economic outlook reminds them of the turmoil seen in prior years. Ashtead’s management was keen to provide clarity on the differences in Ashtead’s business compared to the poor operating years of 2009 and 2010.

Whilst Ashtead will likely remain at liberty to the construction cycle, Ashtead notes that the structure of the industry has largely shifted from machinery and capital goods ownership to preference for rental hire, resulting in more resilient demand even during downturns. Ashtead also has reshaped its end markets, with an improvement from 13% of revenue from specialty products to 30% of revenues from these products in 2022, again creating a more resilient revenue profile. In terms of financial strength, Ashtead also is in a much more responsible position today compared to when the company entered the 2008 financial crisis, where it had significant leverage at 3.2x net debt to EBITDA (1.5x in 2022).

Positive forecasts for the year ahead

Looking to the year ahead, Ashtead forecasts rental revenue growth of 12-14%, driven by robust demand in the US market. Factoring in accretive earnings from acquisitions and a boost from the weaker pound, analysts expect Ashtead to deliver £2.96 of earnings, resulting in a PE ratio of 12 for Ashtead at today’s price. With supply and demand imbalances continuing to favour Ashtead, the shares look attractive at current levels.

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This article does not constitute investment advice. Do your own research or consult a professional advisor.

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