Cherry-pick rental giant building for future
ASHTEAD rents out construction equipment in the UK, US and Canada and its business can be pretty cyclical.
When the economy booms new houses, offices and infrastructure are in demand. But when belts are tightened construction work quickly disappears.
That makes the group’s performance during the pandemic remarkable.
Thanks to Ashtead’s essential business status, its shops remained open, and demand from emergency services and key industries like utilities and telecoms remained strong. The Department of Health alone accounted for 29 per cent of UK revenue in 2020.
As a result, full year revenue fell just 3 per cent in 2020. Impressive in itself, but the real success has been in cash flow. Despite lower operating profits, operating cash flow rose 49 per cent last year. That reflects the decision to delay replacement of rental equipment, since rental rates were down.
Delaying replacement is probably a strategy that works best during a short-sharp downturn – as we saw last year. And we’re not sure it would be quite as effective over a sustained recession. Nonetheless, this gives Ashtead lots of financial flexibility. The very strong free cash flow drove a 21.9 per cent fall in net debt, putting the group in a very strong position going into the 2022 financial year.
Governments have huge spending plans over the coming years, particularly in the US. That would be good news for the construction industry and could spark a surge in rental demand.
We do worry that the extra cash on the balance sheet is burning a hole in the group’s pockets though.
A £1bn share buyback programme comes while the shares are trading on their highest ever valuation. Buying back expensive shares has been a common way to destroy shareholder value in the past – and we would really rather the cash was reinvested or paid out as a special dividend.
Still, the combination of a positive outlook for the group’s end markets and rock-solid balance sheet means the company deserves to be riding high.
“This article is designed for investors who make their own decisions without advice, if unsure whether an investment is right for you, you shouldseek advice. Shares can rise and fall in value so you could get back less than you invest.”