Equipment rental firm Ashtead (AHT) reports another quarter of strong growth led by its Sunbelt operations in the US.
Group rental revenues for the third quarter are up 19% to £1.05bn driving a 21% increase in operating profits to £297m and an 18% increase in earnings per share.
That brings nine-month revenues to £3.1bn, an increase of 18%, and takes operating profits to within a whisker of £1bn (£999.4m), 20% higher than the previous year.
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That the share price has drifted about 2.5% lower to £20.15 in early trade likely indicates wider macro-economic concerns that still linger, not least over medium-term growth in the US. For context, the shares have rallied around 25% so far in 2019, yet they are still marginally below where they started 2018.
US MARKET STILL GROWING
Rental income from the Sunbelt business in the US continues to grow at an impressive pace, up 19% and with 15% of that coming organically (excluding acquisitions). That is in spite of disruption during September and October last year because of hurricane storm damage.
Overall demand remains strong with physical utilisation above 70%.
Revenue growth is coming from the increased amount of kit which Sunbelt rents out rather than higher rates so the ‘yield’ on the rental fleet is flat.
Canada’s contribution to rental income is increasing with nine-month revenues up nearly 60% to £150m thanks to acquisitions although like-for-like growth is 20% which is still impressive.
UK SHOWING SIGNS OF GROWTH
The UK rental business which operates under the A-Plant banner saw total revenues up 2% to £360m over the nine-month period, in line with growth in the first half, while rental-only income was up 5%.
Like the US, growth in the UK is being driven by an increasing amount of kit being hired out rather than higher prices.
The market is still competitive but higher volumes and a squeeze on costs means A-Plant managed to eke out a small improvement in margins last quarter.
HEAVY INVESTMENT PROGRAMME
Capital expenditure for the nine months was £1.1bn net of disposals meaning that Ashtead’s fleet is now valued at £8bn.
Management believes that there is still enough growth in the US market to justify adding new equipment.
‘This level of expenditure reflects the strong market and our ability to take market share’ insists chief executive Geoff Drabble.
Gross capital expenditure before disposals is now forecast to be at the top end of guidance or around £1.6bn both this financial year and next year.
On top of this investment Ashtead spent £491m on bolt-on acquisitions over the nine months and since the end of January it has spent another £104m on three more acquisitions.
KEEP AN EYE ON DEBT RATIOS
While there is still an opportunity to continue growing its fleet of equipment and making bolt-on acquisitions in the US and Canada it undoubtedly makes sense for Ashtead to keep spending.
However, all these investments mean that the ratio of net debt to earnings before interest, tax, depreciation and amortisation (EBITDA) is rising.
That said, at 1.8-times (at the end of January) this financial health metric still sits comfortably within the company's target range of 1.5 to two-times.
Ashtead remains one of Shares running Great Ideas from October.
