Shares in leading tool and industrial equipment rental group Speedy Hire (SDY) climbed 5% to 67p on above-average volume after the firm posted a robust first half trading update and raised its full year outlook.
Sales for the first half to September rose 28% to £186.6 million thanks to a 31.8% increase in hire revenues and a 22.2% increase in service revenues, driven by the rehire business.
Turnover was also above the same period in 2019, with hire revenues growth accelerating from 2.3% in the first quarter to close to 5% by the end of the second quarter.
STRONG DEMAND
As well as benefitting from a strong backdrop of major rail and water infrastructure projects and booming new home and RMI (repair, maintenance and improvement) demand, the firm is gaining market share thanks to new contract and renewals with key customers such as Costain (COST) and Redrow (RDW).
It has also improved its asset utilization rate - i.e. the amount of time its kit is out on hire - by using software to mine its huge database of past rental trends and make sure its core products are always available ahead of time, keeping up its high level of customer service.
As well as serving the building trade, Speedy recently struck a deal with DIY chain B&Q, owned by Kingfisher (KGF), to expand into the retail market. Trial outlets in 16 stores have proved so successful that another 23 outlets are planned, broadening its reach.
Thanks to the positive trading momentum of the first half and the major growth opportunity which lies ahead, chief executive Russell Down said he was ‘confident in delivering full year results ahead of current market expectations and sustainable growth in the medium term’.
HIGHER RETURNS
Adjusted operating profits for the first half were £16.2 million compared with £6.3 million a year ago, helped not only by better utilization and tight cost control but by a better mix of higher-margin businesses.
The re-hire service, where Speedy supplies customers with kit from partner firms which can range from excavators to 1,000-tonne cranes, has seen a big uptick in demand, specifically for temporary accommodation on big infrastructure projects. The margins on re-hire are better than hiring out its own kit.
Similarly, renting equipment to the public through B&Q is more profitable than renting to big commercial customers once trade discounts are factored in, and prices can be raised more easily.
Speedy estimates its 39 B&Q outlets could contribute £10 million of additional revenues with an operating margin as high as 20%, meaning £2 million of extra profits, and discussions are taking place with other potential retail partners.
As a result of its better margins and strong capital base, the firm has reinstated dividends and hinted that going forward it could return cash to shareholders if it finds itself with more capital than it needs to fund its investments.
EXPERT VIEWS
Numis analyst Charlie Campbell raised his full year earnings forecast by 5% and suggested today’s upgrade ‘should help Speedy’s shares recover significant underperformance against the UK building materials sector’, adding the shares look good value on less than 12 times March 2023 earnings.
Adrian Kearsey at Panmure concurred, raising his full year pre-tax profit estimate by just over 5% and reiterating his price target of 113p per share following today’s update.
