Broker tips: Ashtead, DX group
By Iain Gilbert
Date: Wednesday 01 Jul 2020
(Sharecast News) - Analysts at Berenberg lowered their target price on equipment rental company Ashtead from 2,000p to 1,750p on Wednesday, stating the group's recent share price performance had defied "softness" in lead indicators.
Berenberg said it was cautious that Ashtead's shares had continued to soar higher in recent weeks, disregarding underperformance in lead indicators and, instead, enjoying the propulsion of the recurring narrative of a still elusive US infrastructure bill.
Early in June, the German bank argued that a combination of reduced asset utilisation, softer used equipment pricing and renegotiations of rental rates on equipment coming off-hire between cancelled or postponed projects would lead to margin weakness at Ashtead.
Berenberg said Ashtead's 2020 full-year results were in line with expectations and did not affect its thesis either way. However, industry data, on the other hand, had largely continued to support it.
"We remain cautious about the prospects for medium-term profitability and continue to think these risks are not adequately discounted in the share price," said Berenberg, which also reiterated its 'sell' rating on Ashtead.
The analysts said if they "generously" assume that average margins over 2014-2020 reflected mid-cycle margins, then Ashtead typically trades on an enterprise value/sales multiple of 10x mid-cycle margin. However, this means that at present, the group's shares trade on an EV/sales multiple of 12.4x midcycle margin - a 20% premium to history.
"Ashtead now trades at or near a record premium relative to its main peer, United Rentals, on multiple metrics," said Berenberg.
Analysts at Liberum hiked their target price on British logistics outfit DX from 14p to 30p on Wednesday, stating the group had executed "a remarkable turnaround".
Liberum said since DX's current management team arrived on the scene back in October 2017, the group had been refinanced and rescued as its financial performance recovered "to the brink of breakeven".
While Liberum said it was still examining the options for rebuilding profitability and pursuing growth, it said DX had weathered the Covid-19 crisis so far, but highlighted that it felt the group's valuation did not reflect the structural progress to date or the potential for further improvement.
The broker, which also reiterated its 'buy' rating on the group, believes underlying earnings margins could reach "high single-digit levels" on a three-year view, and possibly double-digit levels long term.
"We believe the recovery has been driven by revenue growth, rather than cost-cutting, suggesting the improvements to date are both sustainable and repeatable," said the analysts.
Liberum added that DX's forecast improvement in profitability was expected to be accompanied by a similar improvement and inflexion in free cash flow.
"In our view, this drives an attractive equity-free cash flow yield towards the end of our forecast period, as well as supporting our DCF valuation."
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