Ashtead has reported a 19% rise in first-quarter revenue to $2.7bn, ignoring exchange rates, with rental revenue up 14%. Growth was driven by the US and Canada, where both volumes and pricing helped performance. Underlying operating profit rose 18% to $733m, driven largely by the revenue gains in the US. The UK was a drag, where cost inflation is more than offsetting the benefit of higher prices. Higher capital expenditure led to a free cash outflow of $139m, compared to an inflow of $91m the prior year. Net Debt, including leases, rose from $7.7bn to $9.7bn.
Despite a worse outlook for the UK, guidance remains intact and aims for group rental growth of 13-16% and free cash flow of around $300m. The shares fell 4.8% in early trading. First-quarter results were decent enough for Ashtead, which rents out construction and industrial equipment. Markets were perhaps a little spooked by UK guidance which was moved down, but North America is the real growth driver and with group expectations intact we aren’t too concerned.
The medium-term looks promising as the ongoing expansion into North America starts to yield results, both the US and Canadian divisions benefited from higher rates and volumes. There are several growth drivers in the region, from the onshoring of supply chains to government legislation looking to expand infrastructure and chip manufacturing. Ashtead’s scale and expertise should place it well to be a key supplier for large-scale projects. The bigger players have an advantage in the fragmented industry, and the balance sheet’s being flexed to snap up smaller players in the space.
We’re also supportive of the rental model, which allows customers greater flexibility and helps to counter ongoing supply-chain issues. The proportion of equipment owned by rental companies has increased dramatically and last we heard, Ashtead believes the 55% seen in the US has room to grow. We’re inclined to agree when you consider the rental proportion of equipment in the UK is at 75%.
Debt has risen as investment in expansion continues, but the balance sheet is in reasonable health and means the group can invest to meet the extra demand – opening new stores, expanding its rental fleet and pursuing its strategy of bolt-on acquisitions, where appropriate, too. There are challenges though, not least of which are increasing costs. Ashtead’s been able to pass these on through rent rises, but it’s still having a dampening effect on margin growth.
Construction is a cyclical business, meaning demand tends to ebb and flow alongside economic conditions. In the key US market, recession odds have been decreasing but the chance of lower economic output remains very much intact – even if there’s not technically a recession in the region.
Longer term, we’re supportive of the sector with several structural tailwinds underway and we prefer larger-scale names like Ashtead. We continue to see the potential for growth in the top and bottom lines, but some of that’s already priced in with the valuation sitting close to its long-run average. We still see potential upside from here but prepare for wobbles along the way, and there are no guarantees.