Ashtead gears up as hurricane boost wanes

Buyback eyes £1bn

Ashtead, which normally gets little attention outside of The City, caught the eye of a wider set of investors on Tuesday, at least for a while. Even those least attracted to the unglamorous business of construction gear rental—or simply the risk averse—understand share buybacks. The group will redeem at least £500m of stock over the next 18 months, with the option to enlarge that sum to £1bn. With operating cash flow growth in an unmistakable upturn, chances are high that Ashtead will repurchase the maximum. To be fair, Ashtead’s track record for beating forecasts, as in Tuesday’s second quarter, is solid. The trend has helped its stock to advance in eight of the last nine years. Group confidence suggests profits will also beat the average forecast of £187m in the next quarter as well.

On the other hand, Ashtead’s key weak point has typically been cash flow. It has tended not to keep much cash on hand until recently, as shown by the chart below.

Figure 1 - Ashtead Group Plc. quarterly cash flow growth (levered, U.S. dollars)

Buyback eyes £1bn

Ashtead, which normally gets little attention outside of The City, caught the eye of a wider set of investors on Tuesday, at least for a while. Even those least attracted to the unglamorous business of construction gear rental—or simply the risk averse—understand share buybacks. The group will redeem at least £500m of stock over the next 18 months, with the option to enlarge that sum to £1bn. With operating cash flow growth in an unmistakable upturn, chances are high that Ashtead will repurchase the maximum. To be fair, Ashtead’s track record for beating forecasts, as in Tuesday’s second quarter, is solid. The trend has helped its stock to advance in eight of the last nine years. Group confidence suggests profits will also beat the average forecast of £187m in the next quarter as well.

On the other hand, Ashtead’s key weak point has typically been cash flow. It has tended not to keep much cash on hand until recently, as shown by the chart below.

Figure 1 - Ashtead Group Plc. quarterly cash flow growth (levered, U.S. dollars)

Source: Thomson Reuters and City Index

Just-in-time finances

The business of loaning out capital equipment is, after all, capital intensive. Relatively high rates of depreciation and amortization are required to keep fleets up to date and in good nick. Hence Ashtead has usually opted for a low cash balance or none at all, liquidating inventory when necessary. This seat-of-the pants approach has limited the stock’s appeal. It helps explain the historic discount to a sector that trades at forward price/earnings in the mid-twenties, compared to Ashtead’s current 16 times—and that is almost 10% above historical trend.

After the storms

As U.S. hurricane clean-up passes through and “activity levels normalise during the second half”, the quality of the group’s execution will come into sharper focus. Ashtead reaffirmed commitment to a strategy of bolt-on buys and organic growth on Tuesday, having shelled out around £1bn in H1. That looks above trend. But even if 2018/19 spending is two-thirds lower, it will be a fair ask in view of revenue growth forecasts that have been halved over the last couple of years to 14%.  All, told, it’s little wonder long-term investors keep a close eye on the group’s leverage. £2.85bn as at the end of October is the midpoint of the group’s target range that permits debt to be twice the size of core earnings. “Well-structured” it may be. But Ashtead investors are keeping long-term uncertainties in mind, fading the stock 3% off Tuesday’s highs at the time of writing.

Investors less concerned about liquidity risks have been rewarded with a 39% five-year total return driven by economic recovery in its key market, the U.S. With sterling still nursing a 17% discount compared to five years ago, Ashtead’s just in-time finances will be overlooked for a while yet.