US Edition 
Questor share tip: Ashtead profits jump 50pc
The US focused tool and equipment rental firm reported record sales and profits for the year, but share slip on debt levels, says Questor
Ashtead
831½p-55½
Questor says HOLD
TOOL and construction equipment rental group Ashtead [LON:AHT] reported a record set of full-year results yesterday with pre-tax profit up 50pc and rewarded investors with a 53pc increase in the dividend. However, fears over the weakness of the dollar and persistently high debt levels sent shares sharply lower.
Ashtead said that pre-tax profits had increased by £142m to £356m, on rental revenue up by almost a quarter to £1.47bn for the year ended April. The UK-based and listed company generates the bulk of its revenue in the US. A steady recovery in non-residential construction in the US is driving results.
The group operates as Sunbelt in the US and A-Plant in the UK, and 96pc of operating profit comes from the US.
Ashtead has been taking advantage of the US trading by investing heavily in its fleet of equipment. So while profits have soared cash is still tight. The company generated £645m in operating cash from renting out its equipment, but spent £655m on buying new kit in order to grow revenue and profits. When you add in about £100m in bolt-on acquisitions, it meant net debt increased from £1.01bn to £1.15bn during the year.
Putting that into perspective, net assets on the balance sheet were £824m. When a company generates as much cash as Ashtead it has the choice of going for growth or returning it to shareholders. In the year ended April Ashtead spent £655m on growth and £41m on dividends.
Analysts from Liberum upgraded earnings forecasts by 3pc and 8pc for this year and next year respectively, and consensus is for pre-tax profits to rise another 21pc to £436m, on revenues of £1.84bn. The shares are trading on a P/E ratio of 16.6, falling to 14.5 next year.
Investors need to be careful, though, as operational leverage works both ways. If there is only a marginal slowdown in the US economy, then profits can fall very sharply.
The shares are also trading on about twice the net book value of the assets. So, with this in mind Questor thinks the shares remain no better than a hold.