Questor share tip: Ashtead up on strong start

Ashtead
£10.22+35½p
Questor says HOLD

TOOL and construction equipment rental group Ashtead [LON:AHT] weathered an investor revolt on executive pay at its AGM yesterday as it said first quarter profits had increased on the back of a resilient US construction market.

Ashtead investors made their views known with 28pc voting against the remuneration report at the AGM held yesterday. A spokesma for Pirc, Europes largest independent corporate governance said a vote that high sent a “pretty clear message” to the board about shareholder disatisfaction.

Geoff Drabble, chief executive, defended the pay packages based on the share price performance during the past five years, adding that the company has continued to have a healthy dialogue with shareholders throughout the past three years.

The company said full-year profits will be ahead of expectations sending shares up 3.6pc yesterday, leading the FTSE 100 higher.

Ashtead said that pre-tax profits had increased 21pc on rental revenue up by almost a fifth during the first three months ended July.

Ashtead said it plans to spend 25pc more than previously expected on new kit such as diggers, cherry pickers and drills. Management increased capital expenditure guidance to £875m, up from the previous target of £700m.

The equipment hire group spent £264m on new kit during the first quarter, net of disposals increasing the total rental fleet to £2.8bn, up from £2.5bn a year ago.

The majority of that equipment spend has been in the US as 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. The company said both businesses performed well in the first quarter, with rental revenue growth of 19pc at A-Plant.

Ashtead has been taking advantage of the US trading by investing heavily in its fleet of equipment. So while profits have soared, debt levels are rising. The company had a £63m operating cash outflow during the first three months and net debt increased to £1.3bn at the end of July, up from to £1.19bn at the same stage last year.

Putting that into perspective, net assets on the balance sheet were £878m. When a company generates as much cash as Ashtead it has the choice of going for growth or returning it to shareholders. In the current year Ashtead is expected to spend £875m on new equipment to drive revenue and profit growth and return around £70m by way of dividends.

Investors need to be careful, though, as using the cash and borrowing for rapid growth works both ways. If there is only a marginal slowdown in the US economy, then profits can fall very sharply.

Ashtead says it can easily reduce capital expenditure and sell equipment at the first sign of trouble in order to protect the returns of investors.

The shares are also trading on more than five times their net asset value of around 174p per share. Analysts from Liberum upgraded earnings forecasts by 4pc for this year and next, and market consensus is for pre-tax profits to rise to £439m, on revenues of £1.84bn. The shares are trading on a p/e ratio of 17.6, falling to 14.7 next year.

So, with the shares now trading at all-time highs and already pricing earnings growth of more than 20pc for this year and next, Questor thinks the shares are no better than a hold.