Ashtead Group (LSE: AHT) has seen its share price rise 400% in five years and there is more to cheer today, with its stock up another 8% after positive quarterly results. The FTSE 100-listed business clearly has the right equipment.
Sunny side
It’s an ill wind that blows nobody any good. Hurricane Harvey and Hurricane Irma have ruined lives and inflicted $290bn of damage, according to Accuweather, but the clean-up operation will benefit Ashtead’s US division, Sunbelt, responsible for more than 90% of the group’s earnings. It has 84 equipment branches in Texas and another 58 across Florida so is well placed to assist in both immediate disaster recovery activity and longer-term rebuild work.
Ashtead rents the full range of construction and industrial equipment, which can be used to lift, power, generate, move, dig, compact, drill, support, scrub, pump, direct, heat and ventilate, all urgently required in Texas and Florida. Last week, analyst Jefferies said it could benefit from $50m of recovery spending from Hurricane Harvey alone. Today, chief executive Geoff Drabble agreed the storms will boost demand for the company’s fleet, although he refused to put a figure on it. “Hurricane season has already generated significant activity which will require a major clean-up effort and then a multi-year rebuild programme,” he said.
Dollar strength
We can expect more on that next quarter but today’s results brought plenty of positives, including a 17% rise in group rental revenue to £828.8m at constant exchange rates, rising to 25% once sterling’s weakness against the dollar is taken into account. The business also posted a 21% rise in group underlying pre-tax profit to £238m, and a 10.8% jump in free cashflow to £51m.
Management invested £377m in the business, up from £328m year-on-year, and almost doubled its acquisition spend to £116m. “We continue to execute well on our strategy through a combination of organic growth and bolt-on acquisitions,” Drabble added.
Trumped
There are concerns. Ashtead is operating in a cyclical sector, which makes recent investment risky if the cycle turns, and it has been caught out in the past. The Trump effect is fading as the Donald’s promised $1trn infrastructure spend remains a distant prospect. Ashtead has a debt pile of £2.6bn, although Drabble said strong margins put this comfortably within its target range for net debt-to-EBITDA of 1.5 to 2 times.
However, Ashtead has managed to deliver impressive earnings per share growth in the high double-digits over each of the last five years. This is forecast to continue, albeit at a slower pace, with anticipated EPS growth of 14% in 2018 and 11% in 2019, so it may struggle to five-bag again over the next half decade. Ashtead trades on a forecast yield of just 1.8%, but with whopping cover of 3.9 times, there is scope for dividend progression. A forecast valuation of 14.3 times earnings looks reasonable and with Ashtead expanding into Canada, it still looks like a buy to me.
