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Ashtead - 'making' or 'made' it happen?

By Chris Bailey | Tuesday 12 December 2017

Disclosure: I own shares in one or more of the stocks mentioned. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from ShareProphets). I have no business relationship with any company whose stock is mentioned in this article.

I have had the horn about Ashtead (AHT) shares for a while now, as noted during my write-up a quarter ago. Another quarter, another update...and boy has it continued to clean up with profits ahead of hopes, assisted by the post hurricane-related spend that tends to benefit the construction equipment and related rental business that the company specialises in.

In addition to a 20% odd year-on-year revenue and profit increase, also announced is a decent rise in the interim dividend and an inaugural share buyback initiative with the scope to return up to 10% of the current market cap back to shareholders over the next year or two. Not too shabby at all - and no wonder the company has dubbed its quarterly report 'making it happen'.

Two aspects strike me here. First, I cannot see the backdrop getting noticeably better for Ashtead. Certainly there is market share gain to be had in different regions and geographies in the US and the UK domestic business could of course be more rampant buoyed by a better economy here. Even the much lauded hurricane spend was just an extra 5% odd of the 20% headline rise in revenue. However I struggle to get over the notion that right here, right now does not represent a bit of a turning point.

The first clue comes in the announcement that the long-standing Chairman is to retire at the time of the AGM next September. This is all very orderly and under this Chair the company has prospered. Few have long enough memories to go back into the early years of this century but I remember Ashtead from back then: super highly leveraged and struggling with a rather tough economic backdrop. Today's merry update and strong cash flow feels like it belongs to a completely different company...but it does not.

Whilst I agree that there has been a structural shift towards renting rather than buying construction and related equipment over recent years, this is never deep enough to offset any form of economic slowdown. Pacing through the Ashtead statement today what I note is that in the more macroeconomic segment there is an acknowledgement that some important exogenous data series which over time have provided some insight into demand for the group's products are ahead/up but 'volatile'. Hmm.

And then there is the cash return. Yes at sub x2 debt:ebitda leveraged, Ashtead is not ludicrously extended - and as any shareholders from the early part of this century will attest 'thank god!' However I would not say it is unleveraged either and whilst today's cashflows are damn good, the buyback announcement feels like a quick way to lose balance sheet flexibility. For me, I would bring the net debt down to say one times ebitda and then start to buyback shares. You never know what the world - or the share price - might look like back then.

As with any cyclical-tinged company, the valuation (prospectively x10 EV/ebit) in good times is not pushing it but investment is all about looking forward properly and not just doing easy extrapolations. My concluding thought? Time to get off the Ashtead train at this new improved share price north of the nice round number of twenty quid.

Chris Bailey is the editor of Financial Orbit

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