Ashtead Group plc (AHT) Ordinary 10p

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Ashtead reported revenue growth of 2% over the first half, to $5.7bn. Within that, rental revenue rose 6% to $5.3bn, driven by volume and price improvements. In the key North American market, mega projects and hurricane response efforts more than offset lower activity in local commercial construction markets.

Underlying operating profit fell 1% to $1.5bn, as lower used equipment sales and higher costs more than offset the revenue growth.

Net debt at 31 October 2024 was $10.9bn (2023: $10.6bn), and free cash flow of $420mn compared to a $355mn outflow last year.

Full-year guidance has been lowered, now looking for rental revenue growth of 3-5% (previously 5-8%). Capital expenditure is also coming down, though that is expected to boost free cash flow, which is expected at around $1.4bn (previously $1.2bn).

Ashtead plans to move its main listing to the US, while maintaining a secondary listing in the UK.

An interim dividend of $0.36 per share was announced.

The shares fell 7.7% in early trading.

Our view

With four downgrades in the last five quarters, Ashtead is earning a reputation for falling short.

Growth is losing steam, and higher interest rates continue to trouble the US real estate market, dragging on the outlook. On the bright side, comparable periods should ease from here, and Ashtead's more cautious investment approach, after arguably overspending into a slowing market, means more cash flowing through the business.

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.

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.

We see Ashtead’s plan to shift its primary listing as a small positive, given the opportunity for better valuations and greater access for US investors. UK investors will still have access through a secondary listing on UK markets.

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 there are no guarantees and missteps will be punished.

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.

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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