The fortunes of the tool hire company Ashtead are tied to the health of the shaky US economy. That explains why the FTSE 100 group is so keen to talk up structural catalysts for growth, as well as its ability to defend against a downturn.
There is no sign of any trepidation among US businesses feeding through to demand for the sort of fork-lift trucks and jackhammers that Ashtead leases out. Rental revenue in its core market was 16 per cent higher in the first quarter of this year, better than consensus and at the top end of an annual guidance range of 13 to 16 per cent this year.
True, the pace has slowed, against the 20 per cent-plus rates clocked up last year, but those are punchy comparators. Sales have not been fuelled primarily by racy levels of inflation either. About two thirds of organic revenue growth in the US came from better volumes in the first quarter, with the rest from higher rental rates. Higher sales volumes did more of the heavy lifting last year, too. Sales guidance for the UK division was cut to between 6 and 9 per cent, from 10 to 13 per cent, as the market has weakened. Increases in rental rates have failed to keep pace with cost inflation. It will have little impact on Ashtead — despite retaining its headquarters in London, the UK accounts for just 2 per cent of the group’s profits.
There is a case for offloading its UK operations altogether, although it is not a course of action that Brendan Horgan, the Ashtead boss, says he wants to pursue. Investors don’t expect the boom times to last. The shares trade at 15 times forward earnings, less than half the ten-year peak reached in 2021 and below the long-running average. Ashtead has reduced its construction exposure and diversified into speciality tool rentals, which should lessen the pain from any fall in new projects.
Construction accounts for 45 per cent of revenue, versus almost 90 per cent in the two years after the 2008 financial crisis. About 30 per cent of revenue comes from speciality lines, up from 13 per cent at the time of the last crash. The balance sheet is also on more solid ground, with leverage at 1.6 times adjusted profits before interest, tax and other charges, at the lower end of a target range of between 1.5 and 2. It compares with a multiple of 2.7 in the run-up to the last big downturn in 2007. Naturally, that could easily tick up in the event of a fall in profits. A peak-to-trough decline of the same magnitude as during the 2008 financial crisis would push leverage up to 2.4.
Ashtead is attempting to capitalise on a consolidating US hire market, expanding its fleet and buying up more small businesses next year. It has paid off — since 2010 it has more than tripled its market share to 13 per cent, making it the second-largest player behind United Rentals.
Spending more on its fleet has also meant net debt increased to $9.7 billion by the end of July, up about a quarter year over year, which was accompanied by a higher interest bill. That held back adjusted pre-tax profit growth to 11 per cent in the quarter. Just 60 per cent of drawn debt is fixed, which means its financing costs could rise again this year. The fear is that an expanded fleet sits gathering dust in the event of a downturn, but thus far utilisation rates have held firm.
Ashtead is recouping its outlay on equipment just as quickly, banking just over 60 per cent of the money spent in the US market within 12 months in the first quarter, in line with the same period last year.
With spending up to $4.3 billion this year, Horgan still thinks the business can generate $300 million in free cash. Without such a lofty capital expenditure budget the considerable cash being thrown off by the business could boost its coffers pretty quickly.
ADVICE Hold
WHY Investors are compensated for macro risks and slower growth by a cheaper valuation
Witan Investment Trust
Diversification does not always lead to the best returns. Take Witan Investment Trust’s performance this year. The FTSE 250 constituent ended August within a hair’s breadth of its benchmark, having lost a comfortable lead.
Witan’s underweight position in American stocks, 40 per cent of assets versus 50 per cent for the yardstick it tries to beat, is partly responsible. It is also overweight in the unfashionable UK market.
Its benchmark is a composite of the MSCI All Country World and MSCI UK indices.
The bulk of Witan’s assets are managed by third-party investment houses, including Lindsell Train and Artemis. The idea is that by using many managers, the risk of one having an off year and impeding performance is reduced.
Its eight managers have delivered varying performance this year. Lansdowne, which manages the largest chunk of assets at 18 per cent, lagged its benchmark during the first half of the year, as value stocks underperformed. Jennison, which has a bias towards growth names, delivered a return three times higher than the yardstick it tries to beat.
Tastes shift, and if the Fed is nearing the peak of its interest rate boosting cycle, then these trends could reverse. Other factors that weighed on Witan’s performance this year might prove longer lasting, like its largest exposure, GMO Climate Change Fund. Weakening energy prices and doubts over commodity demand in light of a shakier Chinese economy, have hindered returns. Witan has no plans to reduce this holding, which is 6.2 per cent of assets, pinning its hopes on the longer term climate transition and a bias in GMO for favouring value in a sector prone to hype.
Witan would hardly be the first not to fully capture the rally in US markets this year, given just seven stocks are responsible for nearly all the gains. So far this year, the value of its assets has risen 8.4 per cent, roughly in line with the benchmark. But over the longer term, returns have been relatively pedestrian, at 130 per cent over a ten-year period versus 140 per cent by the benchmark. Backing many managers has tempered volatility, but it hasn’t delivered any knockout performance.
ADVICE Hold
WHY Relative performance not good enough to justify buying
