Overview
Ashtead Group PLC (Ticker Symbol: AHT) is a British multinational with headquarters in London, United Kingdom.  The company rents a variety of construction and industrial equipment for a myriad of applications to a wide range of customers, ranging from nonresidential construction markets to climate control and disaster relief. The company was founded in 1947 as Ashtead Plant Hire Company Limited. In 1968, it was listed on the London Stock Exchange and is a constituent of the FTSE 100 Index. The company operates in the US and the UK and has a limited presence in Canada. Geoff Drabble is the Chief Executive Officer; he was appointed in January 2007. The company's business model includes buying a variety of equipment from leading manufacturers and renting it on a short-term basis to customers through the company's platform. The group's rental fleet is available through a network of stores in the US, Canada and the UK and ranges from small hand-held tools to the largest construction equipment. To create value, the company through nationwide networks in the US and the UK tries to maintain long-term partnerships with leading equipment manufacturers. Strong customer relationships are developed who can access industry-leading technology. The old equipment is sold in the second-hand market to receive a proportion of the original purchase price in disposal proceeds.

Segments
The company primarily operates in the US, Canada and UK, which are also its operational segments. In the US, the company operates through the brand name Sunbelt Rentals US. It is the second largest equipment rental company in the country and seeks to increase in market share rapidly, its primary segment non-residential construction market. The subsidiary has 719 locations in the country with around 12,635 employees working across the country. A-Plant, which operates in the United Kingdom, is the largest equipment rental business in the UK with 194 locations nationwide. The subsidiary is supported by 3,778 employees and serves a market where rental penetration is approximately 75 per cent. In Canada, the company operates Sunbelt Rentals Canada, which started its operations in 2014. The company's market share has been increasing through a series of acquisitions and is currently present in British Columbia, Alberta, Saskatchewan and Ontario through 64 locations, and rents a broad range of construction equipment.

Key Statistics
 


Key Financial Metrics (Nine Months ended 31 January 2019, in £m)
 
(Source: Company Fillings)
 
Financial Highlights (Nine Months ended 31 January 2019, in £m)

The revenue in the first nine months of FY 2019 increased by 19 per cent, at constant exchange rates, to £3,394 million, up from £2,815 million in the corresponding period of 2018, reflecting strong growth in the US and Canadian markets. The revenue from rental operations increased by 18 per cent, at constant exchange rates, to £3,124 million. The markets in Canada, the UK and the US delivered 72 per cent, 5 per cent and 19 per cent rental only revenue growth respectively. The acquisition of CRS in August 2017 led to high growth in Sunbelt Canada, which was mainly driven by acquisitions. Cyclical and fundamental factors continue to assist the US market. Operating profit for nine months FY 2019 surged by 20 per cent, at constant exchange rates, to £999 million, from £825 million in FY 2018. The underlying profit before tax was up by 18 per cent, at constant exchange rates, to £888 million in 9M FY 2019, from £742 million in 9M FY 2018, both at constant exchange rates. This was driven by revenue growth, combined with the company’s focus on drop-through. The post-tax profit was £642 million vs £869 million in the first nine months of FY 2019. The earnings per share was up 34 per cent, at constant exchange rates, to 138.9p in the first nine months of FY 2019, against 102.4p in the corresponding period of 2018. The company reported a capital investment in the business worth £1,290 million (9M FY19), vs £859 million, reported in 9M FY 2018 period. Moreover, £491 million was spent on bolt-on acquisitions, against £315 million in FY 2018, which has added 112 locations and resulted in rental fleet growth of 18 per cent. After spending £550 million to date on share buyback programme, the net debt to EBITDA leverage increased to 1.8x from 1.6x in FY 2018. As a result, the company remains within its target ratio of between 1.5 to 2.0 times, due to the strength of its margins and free cash flow.
 

Financial Ratios


(Source: Thomson Reuters)

Ratios Commentary

The company has consistently performed better than the industry, with all the profitability measures performing better than the industry. Although the ratios decreased in the third quarter ending FY 2019, the fall was not substantial. The high profitability of the group reflects optimal use of resources and excellent control over costs which has led to better margins. The quick and current ratio is better than the industry, reflecting a better liquidity position of the company. Moreover, the small difference between the two ratios demonstrates a high level of cash available within the company. The company's assets/equity ratio is slightly more than the industry. However, the proportion of debt to equity is significantly more than the industry and had increased in the third quarter of FY 2019. This indicates a high portion of leverage in the company. The group's asset turnover ratio, though it has remained stable over the periods, is considerably lower than the industry median.

Valuation Methodology 

Method 1: Price/Earnings Multiple Approach (NTM) (EPS (FY19E) approximately)


Method 2: Price/Book Multiple Approach (NTM)  


To compare Ashtead Group with its peers, Price/Book value has been used. The peers are Aggreko PLC(NTM P/B was 1.37), Brenntag AG (NTM P/B was 2.1),DCC PLC(NTM P/B was 2.79) andSGS SA(NTM P/B was 10.49). The mean of Price/Book (NTM) of the company’s peers was 4.18x.

* All forecasted figures and peers have been taken from Thomson Reuters.
 
Share Price Commentary


(Source: Thomson Reuters)

On 6th March 2019, at the time of writing (before market close), AHT shares were trading at GBX 2,037, down by 1.4 per cent against its previous day closing price. Stock's 52 weeks High and Low is GBX 2,461.00/GBX 1,572.50. At the time of writing, the share was trading 17.23 per cent lower than its 52w High and 29.54 per cent higher than its 52w low. Stock’s average traded volume for 5 days was 1,436,184.60; 30 days - 1,395,999.20 and 90 days - 1,851,422.58. The average traded volume for 5 days was down by 2.88 per cent as compared to 30 days average traded volume. On the valuation front, the stock was trading at a trailing twelve months PE multiple of 12.22x as compared to the industry median of 11.4x. The company’s stock beta was 1.09, reflecting the same directional movement of stock with the index. The outstanding market capitalisation was around £9.63 billion and a dividend yield of 1.67 per cent.
 

Risks Assessment and Growth Prospects

The company expects the full year results to be ahead of the management’s expectations. In the longer term, being a cyclical company, there is a strong relationship between demand for company’s products and levels of economic activity. The construction industry’s business cycles too affect the company’s financials. Any downturn in global economic activity can have an adverse impact on the company’s performance. The company's markets in the US and Canada are going through a structural change: customers are opting to rent equipment rather than own it and the market is consolidating. This gives the company an excellent opportunity to tap on this fundamental shift. The company expects to continue experiencing strong end markets in North America, which is supplemented by the company’s strategy of organic growth helped by targeted bolt-on acquisitions. The UK market is more mature and competitive, but the company is the biggest in its industry and is in a strong position to make the best of market conditions.
 

Conclusion
The company’s growth prospects look favourable as innovations and acquisitions have been made to cut down on costs and expand to new markets. Though the downturn can impact the demand for its product, strong market offering and fundamental shift in the US towards renting, indicates significant growth opportunities. Based on strong fundamental performance and the valuation done using the above two methods, we have given a BUY recommendation with double-digit upside potential based on 12.1x NTM Price/Earnings on FY19E earnings per share and 4.18x NTM Price/Book on FY19E Book value per share.

*The buy recommendation is valid for the current price as covered in the report as on (6th March 2019).

Note- GBp or GBX are interchangeably used for Pence Sterling. 

 Disclaimer

PLEASE BE ADVISED THAT YOUR CONTINUED USE OF THIS SITE OR THE INFORMATION PROVIDED HEREIN SHALL INDICATE YOUR CONSENT AND AGREEMENT TO THESE TERMS.
References to ‘Kalkine’, ‘we’, ‘our’ and ‘us’ refer to Kalkine Limited.
This website is a service of Kalkine Limited. Kalkine Limited is a private limited company, incorporated in England and Wales with registration number 07903332.
The website has been prepared for informational purposes only and is not intended to be used as a complete source of information on any particular company. Kalkine is not responsible for material posted on this website and does not guarantee the content, accuracy, or use of the content in this site. No advice or information, whether oral or written, obtained by you from Kalkine or through or from the service shall create any warranty not expressly stated.
Kalkine do not offer financial advice based upon your personal financial situation or goals, and we shall NOT be held liable for any investment or trading losses you may incur by using the opinions expressed in our publications, market updates, news alerts and corporate profiles. Kalkine does not in any way endorse or recommend individuals, products or services that may be discussed on this site. You should discuss your portfolios and the risk tolerance level appropriate for your personal financial situation, with a professional licensed financial planner and adviser. Our publications are NOT a solicitation or recommendation to buy, sell or hold.