The Ashtead Group (LSE: AHT) share price has more than doubled in the past five years. But it dipped 5% in early trading on FY results day.
The 18 June update showed falling profits at the equipment rental firm, as rental revenue growth failed to hit targets. Ashtead achieved 10%, but had set its guidance at 11%-13%.
Higher debt interest payments didn’t help the bottom line either.
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Profit fall
The figures show a 10% fall in profit before tax for the fourth quarter. And it’s down 2% for the full year, to $2.1bn (£1.7bn). Earnings per share (EPS) fell 6%.
Revenue did grow 7% in Q4, and 12% for the year, so margins are being squeezed.
Free cash flow fell by more than half, to $216m (£170m). That’s after the firm significantly raised its capital expenditure though, putting investment into existing and new greenfield sites.
Still, as the report told us, it did contribute to higher debt, and that does concern me.
Debt
CEO Brendan Horgan spoke of “higher interest expense, reflecting the interest rate environment and increased average debt levels“. I take some conflicting thoughts from that.
Net debt reached $10.7bn (£8.4bn) at 30 April. That’s perhaps not so much for a company with a £23bn market cap. But it pushed the net debt to EBITDA ratio up to 1.7 times, from 1.6, at constant currency.
Things are complicated by IFRS 16 accounting rule changes, which make reported debt look higher. But even excluding that, Ashtead has set its new target range for net debt to EBITDA at 1.0 to 2.0 times (and it would be 1.4 to 2.4 times after IFRS 16).
Does such a wide range trouble anyone? To me, it makes it sound like the board doesn’t have much of a clue about it. It also makes me fear something near the top of the range.
Falling costs?
Still, the other side of it all is the current interest rate environment.
Debt is expensive right now, but that has to change when central banks finally decide to start dropping their interest rates.
What it means to me is that we’re looking at a set of results from an unusual year, in circumstances that don’t make things look so good.
And a year from now, if interest rates are signficantly lower, we might see a whole different outlook for a firm like Ashtead.
Dividend
We did, at least, see a 5% hike in the dividend to 105c (79p). That’s a yield of only 1.5%, mind, so this isn’t a retirement income cash cow just yet.
I expect forecasts to be cut a bit, so the current price-to-earnings (P/E) ratio of 18 for 2025 could rise. But if we get back to the longer term growth that the analysts expect, it could still be fair value.
For me, though, there’s too much uncertainty. And I see cheaper shares out there with lower risk. Maybe in another year.
