What recession? Ashtead has long been viewed as a bellwether for the US economy but the equipment hire giant has defied the blows dealt by double-digit inflation.
Guidance for rental revenue growth this year has been raised to between 18 and 21 per cent, above the 15-17 per cent increase previously expected. The US and Canada, where the FTSE 100 constituent now generates just over 90 per cent of revenue in aggregate, are the driving force for stronger industrial demand.
The difference between past and present guidance is split evenly between higher volumes, better pricing and ancillary revenues, which include things such as delivery charges. Improved rental rates and robust demand mean Ashtead has been able to pass on the bulk of the inflationary pressures it has faced. About 90 per cent of delivery costs have been recouped, up from 80 per cent last year, while fuel has been fully recovered, and then some.
The stronger-than-expected growth comes off the back of high growth last year, when the return of live events and restart of construction projects fuelled demand for heavy equipment. The tool rental giant has a head start in delivering on fresh guidance, as rental revenue growth over the first half of the financial year came in ahead of market expectations and was 26 per cent higher than in the prior year.
An impending US recession and the chilling effect that could have on construction starts, still the largest end market for Ashtead, is the cloud that prevents the shares earning more credit from investors. There has not been any slowdown in construction spending in the US, yet. Spending over the first ten months of this year was almost 11 per cent ahead of the same period last year, according to official US statistics. But construction activity typically lags the wax and wane of the general economy by one to two years.
Investors have become less hesitant than they were during the summer. Shares in the London-based group have risen almost 50 per cent since the end of June and now trade at nearly 16 times forward earnings. That is bang in line with the average multiple recorded over the past decade. Management has held its nerve in the face of the economic challenges. An expansion plan aimed at opening new hire stations across its core US markets and extending existing sites, as well as bolting on smaller rivals, is running unabashedly. The payoff for clustering sites? Economies of scale and the ability to supply more types of equipment, a convenience the company reckons it can charge more for. Pre-pandemic, rental rates for those clustered markets were about 2.3 per cent above areas more sparsely packed and revenue per customer was 15 per cent higher.
Capital expenditure is slated to come in at between $3.3 billion and $3.6 billion this year, ahead of the $2.4 billion spent last year. That will erode free cashflow, which is guided at $300 million for this year, below the $1.1 billion generated last year but broadly in line with pre-pandemic levels. The fear is that an expanded fleet sits gathering dust in the event of a downturn. Utilisation hasn’t been a problem thus far. Ashtead is recouping the outlay on equipment faster, banking 60 per cent of the money spent in the US market within 12 months compared with 54 per cent last year.
Financially, the group is more secure than during the last big economic downturn. At 1.6 times adjusted earnings, net debt remains at the lower end of management’s target leverage range and a way below the multiple of 2.7 recorded immediately before the 2008 financial crisis. Ashtead is in better form to withstand any tests ahead.
ADVICE Hold
WHY Robust rental growth and an undemanding share price compensate for the economic uncertainty ahead
ITM Power
Hydrogen power specialist ITM Power has suffered an epic fall from grace over the past two years. An obscured revenue stream and a high level of cash burn mean there is plenty of room for more profit warnings to materialise in the coming months.
The company has lost just over 80 per cent of its value since the start of last year, after a ferocious rally in the shares during the pandemic. The stock is the fourth most heavily shorted in London, behind fast fashion giants Boohoo and Asos and wine delivery firm Naked Wines.
ITM specialises in making electrolysers used in manufacturing “green” hydrogen from renewable energy sources, seen as crucial to the transition to net zero. In October it warned that manufacturing issues had led to production delays of its new electrolysis technology. Without testing the products, it is also harder to place an accurate estimate of what provisions ITM needs to take for warranties on the equipment. But provisions may need to “materially increase” from the £3 million accounted for at the end of April this year. The upshot? Revenue is expected to come in at the bottom end of the £23 million-£28 million range, but that depends on the tooling equipment required to complete production of its new technology arriving on time, Jefferies points out. If there are further delays, there is “material” risk to revenue guidance being hit at all, it reckons.
Analysts at Jefferies forecast losses before taxes and other charges for this financial year of £51.5 million, higher than the £46.4 million previously forecast. The investment bank also expects increased losses next year of £52.4 million.
On a statutory pre-tax basis, there is no profit in sight. Product development and manufacturing costs mean the group has burnt through a lot of cash. Even after plans to cut inventory levels, management expects cash balances of £320 million to decline to £240 million-£270 million by the end of April. A trading update due this week has been delayed until next year while its new boss Dennis Schulz decides how best to address the issues. There seems to be scant possibility of the shares making any progress any time soon.
ADVICE Avoid
WHY There is a high chance of another profit warning
