Ashtead might trace its roots back to the Surrey village of the same name but the tool hire group is no little Englander. Expansion in the US has boosted the FTSE 100 constituent’s market value more than threefold over the past five years.
Amid creaking supply chains, that scale should serve it well. The return of live events and restart of construction projects has reinvigorated demand for heavy duty equipment after the pandemic-induced slump. Revenue for the first quarter was not only more than a fifth higher than a comparable last year, but also 14 per cent ahead of the pre-pandemic level.
It will not be a shock that there is a shortage of tools. The result? It can charge customers higher rates to let equipment. A 1 per cent average rise in rates had been expected this year but across the fleet, Brendan Horgan, chief executive, reckons rental prices could rise by an average of 3 per cent. That, set against the fact it replaces its equipment only every seven to eight years, should provide a kicker to free cashflow.
Rising rates are offsetting the pinch of a higher wage bill and increasing fuel costs and Ashtead’s operational muscle has strengthened its buying power. If supply chain constraints squeeze at the edges for smaller competitors, then Ashtead could take more market share, too, Berenberg thinks.
The result of bullish management updates is some lofty investor expectations, reflected in a share price equivalent to 22 times earnings forecast for this year, some way above the average multiples recorded in recent years. On the face of it, that looks pricy, but a price to earnings growth ratio of 0.88 looks more compelling. A multiple below one suggests a company could be undervalued. Earnings forecasts are punchy this year, with a 41 per cent rebound anticipated by analysts, but beyond the skew of this year’s economic recovery, growth expectations have been set at almost a fifth over the 2023 and 2024 financial years. What’s behind that?
Over the medium term, management is hoping to grow annual earnings at a compound rate of 15 per cent, and that is without the contribution of acquisitions.
The US business, which trades as Sunbelt, accounts for about 80 per cent of revenue and almost 90 per cent of profit, with Canada and the UK providing the remainder. Part of its strategy is to push revenue higher by opening more hire stores in large rental markets, which will sell different product ranges and then cross-sell to a broader customer base. It’s an approach that in Los Angeles, the second largest US rental market, led to it boosting its market share from 5 per cent in 2016 to 8 per cent.
Bolt-on acquisitions are a constant feature as part of plans to expand into new markets. That included making a foray into film and TV production equipment.
This year the group, which has recently switched to reporting in US dollars, expects to rack up between $2 billion and $2.3 billion in capital expenditure. That does not look like an overstretch. Cash last year was used to reduce debt to a multiple of 1.3 against earnings before tax and other charges, below a target range of 1.5 to 2, and just over $3.1 billion of its debt is still undrawn, with no debt maturing until 2026. Guidance for free cashflow — what’s left after day-to-day expenses are taken care of — was raised last month to between $900 million and $1.1 billion.
After all, Ashtead knows all about what can happen in a downturn, having been stung by tumbling rental rates during the last financial crisis in 2008. More discipline and better market dynamics mean the group is at less risk of being twice bitten.
Advice Buy
Why Higher rental rates and an undersupply of equipment in the market bodes well for profits and could mean it beats expectations again
HarbourVest
The only exposure most people have to private equity is by reading about the shadowy characters depicted in the financial pages. Perhaps that’s one reason why private equity investment trusts, one of the few avenues for retail investors to park cash in the asset class, have gained more attention over the past 12 months.
A case in point is HarbourVest, or HVPE. Shares in the FTSE 250 investment trust have risen more than a third over the past 12 months, outperforming the FTSE All-Share and MSCI World indices. But private equity’s murky reputation doesn’t lend itself to winning over investors easily — shares in HVPE still trade at a 23 per cent discount to the trust’s net asset value.
Those thinking about investing in the trust might be irked at the fact that there’s no official benchmark.
Instead it seeks “to deliver outperformance of the public markets over the long term” and in fairness, it’s got a good record on that front. At the end of August, the trust generated a share price total return of 44 per cent on a one-year basis, 81 per cent on a three-year basis and 168 per cent over five years.
The link between assets managed by HVPE and private companies it seeks to mine for returns is a meandering one. HVPE doesn’t invest directly in any private companies; instead it gains exposure to investments in private companies and portfolios of private companies globally through funds managed by the US-based private equity investment manager HarbourVest Partners. In turn, that firm invests in funds managed by private equity heavyweights like KKR.
The bedrock of HVPE’s investments is in buyout funds, a function partly of the size and diversity of that part of the private equity market, but also an approach designed to minimise the kind of volatility of returns typically delivered by venture capital investments in early-stage companies.
Talk of record cash burning a hole in private equity investors’ pockets might make some investors sceptical over how long HVPE can continue its returns record. But the fact that it’s been a lengthy and consistent one should be reassuring.
Advice Buy
Why Discount attached to shares appears excessive
