In the nine months to 31 January, revenue adjusted for currency changes rose 19% to $5.9bn. This was 17% beyond pre-covid times and reflected a 21% rise in rental revenue, driven by double digit growth in all geographies.
Underlying profit before tax rose 42% to $1.4bn, reflecting margin improvements in the US, UK and Canada as management continued to focus on cost saving and efficiency. However, as activity levels rise, a number of those costs have returned.
Ongoing supply chain constraints, inflation and labour scarcity are expected to benefit Ashtead. This meant management increased full year revenue growth estimates to 20-22% from 18-20%. Free cash flow estimates stayed the same at $900m-$1.1bn.
The group spent $307m on share buybacks in the period.
The shares were up 3.8% following the announcement.
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Our view
Renting out construction equipment has been a great spot to be in as the global economy reopens after nearly 2 years of pandemic-related restrictions. Ashtead's been able to adjust plans to sell its existing equipment to cope with supply-chain delays on new deliveries, allowing it to take full advantage of the helpful environment.
Rental revenue unsurprisingly fell over the pandemic, which is partly why the results look so flattering now. Increased demand from emergency services and key industries like utilities and telecoms also helps buoy results in difficult times. But as we normalise, not all of that increased demand is going to be sticky. Contracts with the Department of Health, which accounted for 32% of sales so far this year, will effectively drop down to nothing once free testing stops from April this year.
That's where the strategy of broadening end markets should help, providing a wider source of revenues. And we're already starting to see the rewards in the US, where diversification has been called out as a driver of sales growth.
However, the real area of success over the last couple of years has been cash flow.
That reflects the decision to delay the replacement of existing rental equipment. Delaying capital expenditure is probably a strategy that works best during a short-sharp downturn and gave Ashtead lots of financial flexibility, despite having a high proportion of inflexible operating costs. But now we're hopefully out from the worst of it, the group feels confident enough to start re-cranking the spending tap, with capex guidance upgraded once again.
This ties in with the fact Governments are planning massive fiscal stimulus over the coming years, particularly in the US, an area of focus for the group's investment, where planned infrastructure spending still has room to run. That would be good news for the wider construction industry and could spark a surge in rental demand.
The balance sheet is in reasonable health, and means the group can invest to meet the extra demand - opening new stores, expanding its rental fleet and pursuing its strategy of bolt-on acquisitions, where appropriate, too.
$311m has been spent buying back shares so far this financial year, as part of the share buyback scheme, over a period when the shares have been trading at a significant premium. Buying back expensive shares has been a common way to destroy shareholder value in the past - and we would really rather that cash was either deployed within the business or paid out as a special dividend. Moving forward, we don't expect the current level of buybacks to be sustained with capex back on the rise.
The combination of a positive outlook for the group's end markets and a strong balance sheet means the company's well positioned. And a competitive position in the fragmented equipment hire business provides scope for long term growth. The valuation has rerated significantly over the past 6 months, likely a product if the blistering highs they reached last year. That makes the entry point now look more attractive than it has in a while. However, global uncertainty poses a risk and if economic conditions take a turn for the worse, construction spending could come under fire.
Ashtead Group key facts
All ratios are sourced from Refinitiv. Please remember yields are variable and not a reliable indicator of future income. Keep in mind key figures shouldn't be looked at on their own - it's important to understand the big picture.
Nine months to 31 January (underlying, constant currency)
Revenue in the US rose from $4.0bn to $4.8bn, reflecting a 19% increase in rental revenue to $3.5bn. This reflected strong growth in the tools business and specialty businesses as well as segment-wide volume increases and a stronger pricing environment. Cash profit (EBITDA) margins were constant at 49% as rising activity meant costs were higher as well. Inflationary pressure, together with investments in technology improvements, also weighed.
A 14% increase in UK rental revenue helped overall sales for the division rise 23% to $750.3m. Roughly 32% of UK revenue was associated with Department of Health contracts, the majority of which is expected to be lost as of April 2022 when free covid tests are stopped. Cash profit margins were 1 percentage point lower at 30%.
Revenue in Canada rose from $269.1m to $370.2m, reflecting a 32% increase in rental revenue. Slower sales last year due to covid restrictions were a large reason for the growth, pandemic-related production restrictions persisted in the third quarter. Cash profit margins increased from 43% to 46%. That reflected an increased contribution from the lighting, grip and studio business, which was impacted by suspended production activities last year.
Capital expenditure was $1.7bn and the group made $239m on asset sales. Strong demand and supply chain delays on new equipment meant the group has postponed some of its fleet sales. The rental fleet was worth $13.2bn as of 31 January 2022.
The rise in capital expenditure together with an increase in buybacks meant free cash flow fell to $738m from $1.4bn. This fed into a 17.4% increase in net debt to $6.9bn. This is within management's target range of 1.9-2.4 times cash profits (EBITDA).
This article is original Hargreaves Lansdown content, published by Hargreaves Lansdown. It was correct as at the date of publication, and our views may have changed since then. Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Refinitiv. These estimates are not a reliable indicator of future performance. Yields are variable and not guaranteed. Investments rise and fall in value so investors could make a loss.
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