Equipment rental firm Lavendon (LVD) flags trouble in the Middle East as the slump in the value of oil hits pricing and payment terms in its Saudi Arabian operations.

However, investors like progress elsewhere in the business with full year results triggering a 2.5% rise in the share price to 136.51p.

Pricing in Saudi slipped 6% over 2015 as increases in prior years skewed the balance between customers renting and buying equipment outright.

Working capital strains have also developed in Saudi Arabia, says chief executive Don Kenny, as cash shortages caused by the oil downturn have made it harder for Lavendon to be paid on time for the use of its fleet.

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'Saudi is where the problem is, so the benefit of having a portfolio type approach to the region, with operations in six different markets, gives us an element of diversification,' Kenny tells Shares.

'The slump in the price of oil means Saudi revenue is falling and there are some big investment which are now being placed on hold.

'There is a liquidity crisis with cash now in very short in supply. But we're not seeing any reduction in demand at present, we have the same amount of equipment out on hire.

'When you have a lot of growth in a rental market you get towards the break-even where a client starts to ask whether it makes sense to rent or own the asset outright.

'We were always expecting the pricing in Saudi to come off a bit and we've seen it decline by around 6% over the course of 2015. That is certainly not the end of the world.

'So volume is normal, pricing is slightly off and we have this liquidity problem which we are confident will improve over time.

'It's not going to happen in 24 hours but I would expect to see things improve over the course of 2016.'

Kenny said Lavendon's fleet investment in the Middle East will continue in markets including Kuwait, Qatar and Oman but further investment is Saudi will be temporarily put on hold.

As well as monitoring developments in Saudi, Kenny has set his sights on a turnaround in Lavendon's German business after successful initiatives in Britain and France in recent years.

Improving return on capital employed (ROCE) in Germany to around 11% would add another percentage point to group-wide ROCE which currently stands at 12.3%.

'We have a track record of delivering improvements in other markets and now we're looking to repeat that in Germany,' says Kenny.

'We are looking at doing something along the lines we did in France, with a more decentralised operating structure rather than running everything from head office.'

Kenny dismissed the threat of aggressive pricing from HSS Hire (HSS) and Speedy Hire (SDY) in the UK, saying many tool hire companies in the UK re-hire Lavendon's own heavy equipment in order to meet the needs of customers.

'The UK has always been competitive,' Kenny says. 'HSS is being aggressive but so are we. We are still the largest player by far in terms of rental of medium and heavy kit in the UK and the smaller tool hire firms tend not to focus on this area as much.'

Issue Date: 25 Feb 2016