Ashtead is one of those businesses that is listed over here but makes an awful lot of money over there. So much so, in fact, that perhaps we should pronounce its name with an American accent — 88 per cent of revenues in the first quarter came from renting out its industrial kit in North America, where it owns Sunbelt Rentals.
It makes no difference to investors, of course, whether a company earns its living in Bognor or Beijing. What matters is whether it works and whether the money keeps coming in. Ashtead has been a prolific growth stock. The question is: can it continue?
Ashtead was founded in 1947, in the Surrey town of the same name, as a supplier of diggers, cement mixers and jackhammers to smaller builders. Having listed on the stock market in 1986, it moved into the United States four years later with the acquisition of Sunbelt. Through organic growth and acquisitions Ashtead has become the second largest equipment rental company in the US. It operates in the UK under the A-Plant brand and is the largest equipment rental business here, though it faces increased competition from businesses such as Speedy Hire and HSS Hire.
In truth, it is the US that is the growth engine, where Ashtead has benefited as builders, construction companies and contractors begin to rent their kit, rather than owning it.
And Ashtead seems to be everywhere. It rents out fleets of cranes, diggers and other tools to help with disaster recovery efforts after, for example, hurricanes and floods. It provides temporary power, lights and barriers for festivals and gigs. It provides the equipment to fit out and maintain office blocks. It has even started to rent out the boards and rigs that protect the ground during stadium events.
Ashtead’s results yesterday for the three months to the end of July were packed with momentum — enough, indeed, to prompt management, swiftly followed by analysts, to tickle up their numbers. Analysts at Peel Hunt added £25 million to their annual pre-tax profits forecast, taking it to £1.075 billion, which would represent a 16 per cent increase on last year’s £927.3 million.
Ashtead’s US earnings are flattered by acquisitions and the strength of the dollar, but underlying growth is still an impressive 17 per cent. Its British business is more mature, but there is nothing wrong with quarterly revenue growth of 5.7 per cent and with it a profit margin of 37.8 per cent.
Ashtead is investing heavily, spending £465 million during the three months, against £415 million a year ago. It is bolstering its growth with acquisitions, spending £145 million on bolt-ons, up from £116 million last year.
And so to growth. When this column last visited Ashtead in December, it suggested that some of the factors benefiting the group, such as hurricane damage and currency movements, would start to fall away. It recommended that investors take profits, when the shares stood at £19.49. Since then they have risen by more than 22 per cent and were up 118p at £23.98 yesterday.
Is it worth buying back in? The shares are not expensive, trading at about 18.6 times last year’s earnings, although they yield a modest 1.4 per cent or so. What makes Ashtead compelling is its growth potential. Sunbelt has only 8 per cent of the US market. United Rentals, the market leader, has 12 per cent. At 55 per cent, more than half the equipment hire market is served by thousands of independent businesses, a consolidation opportunity if ever there was one. The shares, boosted by a substantial buyback programme that was increased yesterday, look like a firm “buy”.
ADVICE Buy
WHY The American market offers a massive growth opportunity that Ashtead is taking great advantage of
Hilton Food Group
Who’d have thought there’d be so much potential in packing meat and fish? Hilton Food Group, which does just that (albeit with some subtler embellishments) showed a clean pair of heels to analysts’ forecasts with yesterday’s first-half results for the 28 weeks to July 15.
The numbers underscored the potential still to be unlocked from Hilton’s business, although a good deal of this seems to be reflected in the share price, which gives it a rich valuation that is justified only if it continues to beat the targets.
Hilton Food was set up in 1994 to pack beef and lamb for Tesco from its factory in Huntingdon, Cambridgeshire. It used supply agreements with retailers to expand to the Continent, including Sweden, Portugal, the Czech Republic and Slovakia. It moved into Australia in 2013 via a joint venture with Woolworths, the local retailer, which it expanded several times before taking full control of the operation in July. It moved into the processing and supply of fish late last year with the acquisition of Seachill for £80.8 million, which brought with it a relationship with Waitrose & Partners. As of last year it also packs sandwiches, pizzas, ready meals and soups for Tesco in central Europe.
By far the biggest part of Hilton’s business is western Europe, including Britain. Revenues at this division increased from £643.6 million to £810.1 million, although this was boosted by Seachill. The largest opportunity is in Australia, where Hilton is busy with a new mince production line in Brisbane that helped to raise packing volumes 27.6 per cent compared with last year.
Confusingly, sales in Australia will not appear in Hilton’s numbers until it takes full ownership of the assets on top of the operations, which will not occur for two years. When they do come, analysts are pencilling in a big jump in revenues, in Numis’s case to more than £2.2 billion in 2020, against £1.36 billion last year.
Hilton’s shares, up 50p to 990p yesterday, trade on a chunky multiple of more than 26 times last year’s earnings, with a dividend yield of just over 1.9 per cent. That does not justify a “buy”, but they are well worth holding.
ADVICE Hold
WHY Expansion in Australia could be highly rewarding, but looks to be built into the price
