It underscores what tumultuous times we’re in that a blue-chip company can upgrade its annual profit forecast when revenues have been sliding and its shares falling as a result (Miles Costello writes).
This is what happened with Ashtead yesterday. The equipment hire group published a nine-month trading statement that showed a fall in turnover and pre-tax profit, only to guide investors to expect higher earnings for the full year.
The shares lost close to 2 per cent at one point, eventually closing 49p or 1.2 per cent down at £39.69. Call it profit taking but to management it might feel personal.
Ashtead Group was founded in the Surrey town of the same name in 1947 and initially supplied equipment for small construction jobs to local farmers and builders. Having listed in London in 1986, it made its first move into the US market four years later by buying Sunbelt Rentals.
Two acquisitions and plenty of growth later, Ashtead is the second-largest equipment supplier in the United States, behind United Rentals. It continues to operate in Britain, where it has rebranded its A-Plant business under the American moniker, and in Canada, but both account for a small share of profits.
A member of the FTSE 100 with a market value of just over £18 billion and more than 18,600 staff, Ashtead made a pre-tax profit of nearly £1.1 billion on revenue of more than £4.6 billion in the 12 months to the end of April last year.
While it might be tempting to conclude that, as a supplier of kit from diggers to cranes, the group’s fortunes are closely tied to the construction markets, that’s not quite right. Ashtead works in disaster recovery, rents temporary power generators to festivals and events, supplies lights, temporary bridges and barriers and fits out offices. As an example, it has rented marquees, traffic cones, signs and electricity to Covid-testing and vaccination centres in the UK and US.
Ashtead has not been immune to the pandemic, but trading has been surprisingly resilient. According to its trading update, revenues fell by 2 per cent to £3.76 billion over the nine months to the end of January and pre-tax profit was down by 17 per cent to £716 million.
Tellingly, however, the fall in turnover during the third quarter was only 1 per cent, signalling that the rate of decline has eased in more recent months. Pre-tax profit, which has fallen by more than sales because of the fixed costs of paying staff, none of whom were furloughed, was off by only 4 per cent to £210 million between the beginning of November and January 31.
Meanwhile, its move to emphasise capital efficiency led Ashtead to generate a record £1.1 billion in free cashflow over the nine months, nearly three times higher than over the same period the previous year. That has also helped to bring down leverage.
The net result of this is that Ashtead expects to limit the fall in revenues in the US to 4 per cent over the year to the end of April, against its previous guidance of up to 7 per cent. Revenues in the UK and Canada should grow by between 15 per cent and 20 per cent.
Although the company did not spell out its likely annual earnings, analysts at Barclays are looking for a pre-tax profit of £945 million, against £1.06 billion for last year. That is a fall of just under 11 per cent that could have been considerably worse, and Barclays reckons profits will be back up again next year and beyond.
Ashtead is a class operator whose shares are finally being more highly valued by the market. The stock trades for 25.7 times Citi’s forecast earnings for a yield of 0.8 per cent. It should have more to give over the longer term.
Advice Buy
Why Has traded well during the disruptions of the crisis and is more efficient and well positioned to grow again
Weir Group
This autumn will mark the fifth anniversary of Jon Stanton’s appointment as chief executive of Weir Group (Greig Cameron writes). It is not always a smooth succession for a finance director, which he had been since 2010, to make the change to the top role but Stanton, 53, has streamlined the engineering company while investing in developing technology to aid a move towards net-zero emissions.
Weir, which was founded 150 years ago, makes components such as valves, pumps and grinding tools. Much of its revenue comes from providing spare parts and maintenance for this equipment.
Stanton has overseen the sale of its flow control and oil and gas divisions to leave Weir heavily concentrated on the minerals market. Rising demand for items such as copper and lithium is expected to fuel a steady upturn in mining in the near future.
Stanton also did the biggest value deal in Weir’s history buying Esco, an American provider of heavy plant tools, for close to £1 billion.
The pandemic dampened performance in 2020, with revenue down 4 per cent to about £2 billion and pre-tax profit dropping 3 per cent to £184 million. The dividend was also withdrawn though Weir laid out plans yesterday on how it intends to reinstate that. Stanton is aiming for the payout ratio to be 33 per cent of earnings per share. For 2020 Weir reported adjusted earnings per share of 74.4p, down from 78.1p in the previous year. Further guidance on when the dividend will be restored is expected later this year.
Stanton pointed out that access to mines in certain countries was likely to prove difficult for some time until coronavirus vaccines are more widely available. That may constrain some sales activity in the short term but he remains confident that miners need to invest for the expansion that they will have to go through. Part of that will involve a drive towards lower-emissions tools where possible such as grinding equipment that has no need for water and uses 40 per cent less energy than usual.
Weir’s shares were worth about £17 when Stanton took over and have been close to £21 this year. Yesterday they closed down 57½p or 2.9 per cent at £19.48½.
Advice Buy
Why Attractive growth drivers in markets where Weir has long-term ties with customers
