Brokers reiterate 'buy' on Ashtead, pushing shares higher, after bumper first-half
By Abigail Townsend
Date: Tuesday 11 Dec 2018
(Sharecast News) - Brokers have backed Ashtead Group's booming US business, after the rental company posted a strong set of interim numbers and upped its full-year targets.
Interim pre-tax profits at Ashtead, which loans industrial equipment such as diggers and other construction tools, surged 25% to £610m, while group rental revenues were ahead 18% at £2.04bn.
The group also struck a bullish note for the health of the wider construction sector and said it expected to beat its own expectations for the full-year.
Most of the growth has come from Ashtead's US division Sunbelt, which has been investing in equipment and expanding its Canadian presence.
Nicholas Hyett, equity analyst at Hargreaves Lansdown, said: "Ashtead is one of the most heavily US exposed businesses on the UK stock market, and as Trump's America enjoys a tax cut-fuelled investment boom, that's stood it in great stead. Investment has dramatically increased the kit Ashtead has available for rent and both the US and Canada have seen the amount of equipment on rent at any one time increase."
Hyett warned that higher investment meant debt had reached £761m, leaving Ashtead "more vulnerable to a downturn". But he added: "Overall it looks like Ashtead's bet on US growth is paying dividends, and there is little sign in these numbers that the boom has run its course."
Analysts at AJ Bell said: "The US is a key focus for Ashtead, where construction spending is growth faster than GDP, driven mainly by private non-residential building and big infrastructure profits.
"Ashtead consistently invests in its existing business and also makes bolt-on acquisitions. This is driving high rates of growth and the company is also managing to remove costs."
RBC Capital Markets, which has an 'outperform' recommendation on Ashtead and a price target of 2,800p, said: "The market is clearly beginning to discount the end of the cycle in the US."
But it reiterated its recommendation, arguing that much of the risk was already being factored in. "We certainly don't expect to see a significant deterioration in US non-residential construction markets during 2019 - order backlogs remain at record highs.
"We also continue to question if the relentless focus on this one data point is valid, given the weighting of Sunbelt revenues is now outside of construction in the US."
Andrew Nussey, analyst at Peel Hunt, which has a 'buy' recommendation, said: "We anticipate increasing our April 2019 pre-tax profits from £1.075bn (consensus £1.048bn) to £1.1bn, to give earnings per share of 178p. We have left currency unchanged for now, but this could add a further 2%. Shares have been weak on wider macro concerns and continue to offer value on 8.4x April 2020 EPS, given growth, quality and positioning. We maintain our target price of 2,500p to reflect the momentum and upgrades."
Charlie Campbell at Liberum has a 'buy' and 2,390p price target on Ashtead. He expects consensus pre-tax profits to rise by around 3% on a constant currency basis or as much as 7% if sterling/dollar fluctuations are taken into account.
"Investment in fleet, share buybacks and the dividend all speak to confidence of management in outlook," he added.
After Ashtead's shares lost a third of their value in the last three months, Richard Hunter, head of markets at interactive investor, added a cautionary note.
"There have been more recent concerns of an imminent downturn in the US construction market - and, for some, the economic situation in general - which has led to an erratic performance of late in the major indices. Coupled with Ashtead's exposure to an extremely cyclical market and an acquisition nature, which brings potential execution risks, the shares have been pounded even if the company's performance is painting a different picture. From an investment perspective, the dividend yield of just over 2% is unremarkable."
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