Ashtead standing strong despite US jitters

WEAKER sterling and the prospect of a US infrastructure spending binge helped Ashtead shares put in a cracking performance in the second half of 2016, rising 48.5 per cent.

However, this year the construction equipment rental business, which generates almost 90 per cent of revenues in the US, has come off the boil. The fear is that an embattled Trump administration will struggle to deliver spending plans.

Last week’s results suggest those fears may have been premature. The percentage of equipment on rent at any one time rose in both the UK and US businesses, and is at a record high for this time of year. Higher utilisation was accompanied by continuing investment and expansion. These factors helped rental revenues rise 13 per cent this year.

Going forward, Ashtead continues to target double-digit growth out to 2021, benefiting from what is already proving a strong economic recovery in the US and the increasing trend towards renting rather than owning construction equipment.

Equipment rental is a fragmented industry, so the group should have plenty of opportunity to seize market share. This is reflected in planned capital expenditure, with next year set to be similar to the £1billion spent in 2016/17. However, Ashtead is notoriously cyclical – something it hasn’t been great at managing in the past. The company was laden with debt going into the financial crisis, after splashing $1billion on a US rental firm just before the crash. When construction markets dried up, the share price fell more than 85 per cent.

Investment means net debt is creeping up again, but at the moment it seems to be exercising a sensible degree of caution. Assuming replacement capital expenditure remains low, the group should generate solid cash flows over the next few years. Ashtead is prioritising reinvestment, so the dividend yield is low at 1.8 per cent, but with the dividend up 22 per cent this year, it’s unlikely shareholders will be feeling too neglected. It’s worth noting that the positive outlook is reflected in the share price.

On a price to book basis, shares trade on multiple of 5.6 times – well above the longer term average of 4.1.

“This article is designed for investors who make their own decisions without advice, if unsure whether an investment is right for you, you should seek advice. Shares can rise and fall in value so you could get back less than you invest.”