Shares in heavy equipment rental expert Ashtead Group (LSE: AHT) fell 2.3% today after it reported solid results for FY 2017.
Rental revenues increased 13% at constant exchange rates, or 28% when weakened sterling was taken into account. Earnings per share increased 7% to 104.3p. The company continued to rapidly consolidate the rental industry in the US, spending £437 on bolt-on acquisitions. As a result, debt increased to a manageable £2bn.
As a major player in a still-fragmented industry, Ashtead has both the advantage of scale and the chance to rapidly expand through bolt-on acquisitions which can then be made more profitable through integration into the business.
In the US, its Sunbelt rental business is the second largest in the industry and commands around only 6% of the market, with the number one serving around double that.
Essentially, Ashtead buys heavy equipment so smaller firms don’t have to. These machines are booked in advance, allowing it to move the equipment between depots high rental rates. Therefore, larger players are more efficient and profitable.
Of course, it is still vulnerable to the sudden swings of the construction market; if things don’t get built, its equipment doesn’t get rented. Yet there’s no sign of a slowdown on the horizon however, and fleet utilisation sits at record highs, indicating a bright year for the company.
Regarding outlook, CEO Geoff Drabble said: “Our end markets remain strong and, most importantly, we continue to see structural change as our customers increasingly rely on the flexibility of rental.”
If indeed there is a structural change towards hiring rather than buying equipment this could be very good news for Ashtead in the long run, but more research is clearly needed here to validate the CEO’s statement.
Hot Growth At Halma
Revenues exploded 20% in 2017 at leading safety, health and environmental technology group Halma (LSE: HLMA), yet the shares remained largely flat throughout trading today because the market expects growth of this company.
Over the past five years, the company has achieved compound annual growth rates of 10% for revenue and 11% for profit, indicating increasing margins. Also note that last year’s growth was well above average, so maybe the company is once again entering a rapid period of expansion.
The services provided by the company are very often mission-critical and heavily regulated. This results in predictable repeat spending and high profits because people are willing to pay up for safety and would-be competitors must somehow reach high technical standards to even consider competing.
For such a ‘dull’ industry however, Halma clearly does not heed health warnings. Its growth target is to double every five years, a rather demanding task if you extend the maths out a few decades, but one that it has successfully executed for some time now.
The company creates plenty of free cashflow (around £140m last year) and uses it to expand via bolt-ons, much like Ashtead. Unlike Ashtead though, the balance sheet is solid and net debt could nearly be eliminated using one year’s free-cash-flow.
An increase to the final dividend leaves Halma yielding 1.2% compared to Ashtead’s 1.7%, but if you buy the former, it’s for the growth. Trading at 33 times last year’s earnings, the company isn’t cheap, but its high returns on capital, wonderful track record and free cashflow generation convince me this could be a good addition to a growth portfolio.
