Ashtead reported 2% growth in first-quarter revenue to $2.8bn, in line with expectations. Within that, rental revenue rose 7% to $2.5bn as the larger US segment saw better volume and pricing. Canadian rental revenue benefited from a recovery following the end of the writers’ strike.
Underlying operating profit fell 2% to $717mn, as lower used equipment sales and higher total costs more than offset the revenue growth.
Net debt at 31 July 2024 was $10.8bn (2023: $9.7bn), and free cash flow of $161mn compared to a $139mn outflow last year.
Full-year guidance was unchanged, looking for rental revenue growth of 5-8% and free cash flow of around $1.2bn.
The shares rose 4.0% in early trading.
Our view
Off the heels of three straight quarters where guidance was lowered, the new year looks to be back on track. Previous disappointments were largely due to overspending at a time when the market slowed. Investment is now set to come in at the low end of current guidance, which makes the free cash flow guide look very achievable.
Growth is slowing, but it’s worth keeping things in context. Last year’s performance was at record levels and Ashtead is still demonstrating its strength, just in a softer market.
North America remains the real growth opportunity, and over the medium term, we still think the outlook is promising. There are several growth drivers here, ranging from the onshoring of supply chains to government legislation looking to expand infrastructure and chip manufacturing.
There’s been some softness in the selling price of second-hand equipment compared to inflated levels seen in the recent past. But nonetheless, rental prices are proving strong and are expected to stay that way. There are also some conflicting views around non-residential construction trends in the US (aside from mega-projects, this is a key market), but we think the data points to improving trends.
Ashtead's scale and expertise are proving valuable, and the group's taking around 30% market share of these mega-projects in the US. The bigger players have an advantage in the fragmented industry, and the balance sheet's being flexed to snap up smaller players in the space.
Growing the speciality business is also a key strategy (things like scaffolding, flooring and air conditioning). These businesses present a varied income stream for Ashtead which should help provide a little more resilience during downturns.
But, in the end, construction is a cyclical business. Demand tends to ebb and flow alongside economic conditions. In the key US market, the chance of lower economic output remains a risk - even if there's not technically a recession in the region.
Debt has risen as investment in expansion continued in recent quarters, but the balance sheet is in reasonable health and means the group can invest to meet the extra demand when appropriate. As mentioned earlier, investment is set to calm in coming year, as the focus shifts from expansion to cash retention.
Longer term, we're supportive of the sector with several structural tailwinds underway and we prefer larger-scale names like Ashtead. We continue to expect growth in the top and bottom lines, and still see some upside to the current valuation. But despite some softer growth, valuation moves this year have been positive, increasing the chances of poor reactions to missteps.
Environmental, social and governance risk
General Industrial companies are medium risk in terms of ESG but can trend up to the higher end of the spectrum depending on subindustry. The primary risks can include labour relations, emissions (either product or production-based), business ethics and product governance. Other concerns are waste and health & safety.
According to Sustainalytics, Ashtead’s overall management of material ESG issues is strong.
Ashtead reports on Scope 1 and 2 emissions, has initiatives in place to reduce emissions, and aligns these initiatives with its risk management programme. Within the last three years, the company's carbon intensity trend experienced a moderate decline. ESG reporting is strong, and executive pay is explicitly tied to ESG performance targets.
Ashtead key facts
All ratios are sourced from Refinitiv, based on previous day’s closing values. 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.
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