Fool's Eye View

[ February 10, 2000 ]

Ashtead Going Solo

By Maynard Paton (TMFMayn)

Carburton Street, London -- On a recent trawl to seek potential candidates for the Qualiport, I came across one company that was undergoing a little turbulence -- Ashtead Group (LSE: AHT).

Through a combination of organic and acquired growth, Ashtead has become a leading operator of UK and US equipment-rental depots. But I subsequently dismissed the firm from becoming a member of the Qualiport on the grounds of their heavy capital expenditure. The large amounts of fixed assets required to generate a profit at Ashtead didn't really meet the Qualiport criteria.

However, the historical sales and profit growth delivered by Ashtead, the performance that initially attracted me to the company, did look impressive.

          1999   1998   1997   1996   1995   1994   1993 
          (£m)   (£m)   (£m)   (£m)   (£m)   (£m)   (£m) 
 
Turnover  256.0  202.5  147.6  95.9   67.3   43.8   33.9 
 
Operating 
Profit     50.5   40.5   30.1  18.0   13.9    7.4    3.6 
 
Earnings 
Per Share  12.3   10.0    8.0   6.5    5.3    3.3    1.5 
(p)

Ashtead released its 1999 interim results on the 3rd February, immediately after the Qualiport rejection. The share price has since plunged from around 160p to languish at 102.5p today. A poor set of results, you might think? Well not exactly. The figures, on the face of it, appeared reasonable. Sales and profits were up over 16%.

Some Ashtead shareholders, however, had other things on their mind -- corporate activity was on the cards. But the interim announcement put an end to months of takeover speculation and those who had anticipated a bid disappointingly, and quickly, dumped the shares.

Strategic Review

The hullabaloo surrounding Ashtead's corporate future commenced last August. The group publicly announced a "review of strategic options to enhance shareholder value, which could include a merger, joint venture or the sale of the company."

The reasoning behind the announcement was events over in the US. Prior to the announcement, Chairman Peter Lewis had commented in his annual statement: "Ashtead is today the tenth largest (operator) in the US out of a universe of 17-20,000 competitors. The prospects for growth in America over the next few years are, arguably, the best the worldwide rental industry has ever known. We hope to play our part."

In the rush to capitalise on the ever-growing US trend for clients to hire their tools rather than own them outright, growth by acquisition had become the name of the game. Peter Lewis, very commendably, remarked on the lack of "sensible" prices being paid by his consolidating competitors within the US acquisition frenzy. Unusually for a Chairman's report, he gave a specific example: "The recent offer for RSC (Rental Service Corporation) by Atlas Copco has reinforced high EBITDA multiples for acquired business."

With the US consolidators having higher-rated share prices than Ashtead, the UK firm couldn't and wouldn't compete in the paper-based acquisition stakes. Instead, Ashtead continued opening new American "greenfield" rental depots.

Peter Lewis robustly commented on the alternative strategy: "It is your management's belief that, taking anything other than a very short term view, this (greenfield) approach is a better use of shareholders' funds than the payment of very high levels of goodwill for highly-priced acquisitions."

But Ashtead, it would seem, was swimming against the tide. It was itself becoming a target of the hungry consolidators. A "number of enquiries regarding a range of possible strategic transactions" prompted the aforementioned Ashtead corporate review last August.

With economies of scale becoming all-important, and clients now demanding a range of services that only the very largest of operators could provide, Ashtead had to consider some sort of corporate US link-up. Either that, or they would fall very far behind.

And so we return to this month's interim results, and Ashtead now deciding to remain independent. The underlying motive for this decision was a sharp subsequent decline in valuations of the US competitors, a decline that had impacted their acquisition progress. In terms of increasing the number of US depots, Ashtead now appears to be playing on level terms with its American cousins.

But the collapse of the valuation of Ashtead does appear harsh. Part of the current disenchantment with the company stems from Ashtead's refusal to accept a bid. It had been in discussions concerning a recommended offer, but failed to conclude any suitable agreement. There have been recent rumours of a rejected 200p bid placed upon the Ashtead table.

An Irresistible Opportunity?

With all the current disillusionment, Ashtead shares now stand on a historic price to earnings (P/E) ratio of 8.3, with a prospective P/E of just 7.8. So, does the failure of Ashtead to finalise an acceptable deal and its decision to instead go it alone, now produce an irresistible investment opportunity for a company with an inspiring financial record?

Certainly the comments from the latest Annual Report and remarks made at the interim stage do give the impression that it could be "back to business".

After the declaration of independence, Peter Lewis established demanding sales growth targets for the company. A 10% level of annual UK sales growth and a 30% level of annual US sales is now expected. "By April 2003, Ashtead will be generating sales turnover of about £500m a year" Lewis boldly stated after the recent interims. Indeed, these are very confident words for a business that currently generates revenues of just £256m.

No doubt part of the growth will be generated from extra depots and small acquisitions, but Ashtead does have "hidden" sales waiting to filter through as well. Depots added in the last two years, accounting for nearly half of the total Ashtead estate, produce just a fraction of revenues when compared to the more established units. Should the new depots achieve a similar performance to the mature units, £100m of additional revenue could be created.

There does appear to be ample scope, especially in the US, for improved sales growth. US rental companies accounted for only 20% of manufacturers' sales during 1999, contrasting to a 70% figure in the UK. Ashtead's US operation, concentrating on the southeastern states, has seen a four-fold rise in sales over the last three years and Ashtead expects its number of US depots to double over the next two years. "The opportunities for sustained growth in our primary markets border on the unlimited," was a very bullish description from Peter Lewis last year.

After rebuffing the approaches from predators, and deciding to go solo, Ashtead has to deliver on the promise of growth. It has done so in the past. Peter Lewis likes to remind shareholders in the Annual Report that he has kept his word before, after declaring in 1991 that he would change Ashtead from being a minor UK player to become "an internationally-based rentals group". Certainly, any company chairman who opens his annual statement "Dear Owner" looks to have the interest of his shareholders at heart.

The financial track record so far, the admirable management approach of refusing to pay top-dollar for acquisitions when all around were, and the mean stock market rating compared to the future growth potential, could all make Ashtead an interesting recovery story.

All comments on this feature are welcome, and can be directed to the Ashtead message board.