Tuesday 11 September 2018 12:11 pm

Shares up at construction rental firm Ashtead after quarterly results

Shares in equipment rental company Ashtead were up 4.7 per cent this morning after the firm reported boosted revenue and profits in the first fiscal quarter driven by an surge in the US construction market.

The figures

Rental revenue was up by 19 per cent to £961m and underlying profit before tax was boosted by 23 per cent to £286m between May and the end of July.

The FTSE 100 group, which makes 84 per cent of its revenue through its US business Sunbelt, said full year results are likely to be ahead of expectations, helped by a weaker sterling.

The firm planned to raise share buybacks to £125m per quarter from a previous estimate of £100m.

What Ashtead said

Chief executive Geoff Drabble said: "Our end markets remain strong and are supported by continued structural change as customers rely increasingly on rental while we leverage the benefits of scale.

"We continue to execute well on our strategy through a combination of organic growth and bolt-on acquisitions, investing £465m by way of capital expenditure and £145m on bolt-on acquisitions in the quarter.

"Our strong margins and lower replacement capital expenditure are delivering good earnings growth and significant free cash flow generation."

"Our business is performing well in supportive end markets. With the benefit of weaker sterling, we expect full year results to be ahead of our expectations and the Board continues to look to the medium term with confidence."

What analysts said

Ashtead is benefiting from a boost in the rental market, where construction companies prefer to rent equipment rather than buy it, analysts said.

“Ashtead’s qualities are very clear to see: it generates lots of cash which is ploughed back into the business to help it build scale as well as fund generous dividends for shareholders. It has been enjoying a structural growth market for a long time where construction companies prefer to rent equipment rather than buy outright," AJ Bell investment director Russ Mould said.

“The US business Sunbelt generates the bulk of Ashtead’s profit and is currently seeing growth driven by a greater amount of fleet on hire, although the percentage of its overall fleet being rented out has stayed flat at 73% average utilisation rate.

“The challenge for Ashtead is to make sure it isn’t left with excess fleet should demand suddenly drop. It is a highly cyclical business and would clearly be vulnerable to a construction market and/or wider economic slowdown."

Hargreaves Lansdown equity analyst Nicholas Hyett added: "Donald Trump’s economic policies are playing out quite nicely for Ashtead.

"A massive cut to corporation tax has done wonders for profits this year, and it’s also sparked a round of investment in the domestic US economy which is seeing demand for Ashtead’s construction equipment soar.

"Quite sensibly, Ashtead’s looking to make the most of those conditions with a spending splurge to fill out its rental fleet, and with the percentage of equipment on rent holding steady despite the increased spending, it’s certainly not overshooting demand. Surging sales means leverage is actually falling, despite the debt taken on to fund that growth."

He added: "A construction downturn would hit earnings far quicker than Ashtead can pay down debt. With the boom being fuelled by a Presidential administration that’s erratic to say the least, we’re pleased to see leverage at the lower end of target, and would really rather it stayed there for the time being.”