CEO Geoff Drabble says he expects full year results to be ahead of expectations ‘with the benefit of weaker sterling’. Ashtead benefits from a weaker pound as its US business Sunbelt, which produces the bulk of the company’s profits, generates its income in dollars.
AJ Bell investment director Russ Mould says ‘Ashtead’s qualities are very clear to see: it generates lots of cash which is ploughed back into the business to help it build scale as well as fund generous dividends for shareholders.
'It has been enjoying a structural growth market for a long time where construction companies prefer to rent equipment rather than buy outright.'
Andy Murphy, analyst at investment bank Bank of America Merrill Lynch, concurs, saying 'Ashtead is very likely to be a long term winner in our ever-changing world as equipment rental, instead of asset ownership permeates its developed markets'.
In its first quarter to 31 July, Ashtead’s underlying rental revenue rose 19% to £961m while underlying pre-tax profits improved 23% to £285.6m.
As Mould alludes to, the company invested £465m back into the business during the quarter although being a cyclical business, high levels of investment in its fleet might cause problems if there’s a downturn.
The company is also spending money on bolt-on acquisitions, £145m during the first quarter, to supplement organic growth from the existing business.
Ashtead is also continuing to make good on its share buy back programme announced in December 2017. It has spent £300m since it announced the programme and says it will spend £125m per quarter resulting in a total outlay of £675m.
For the next financial year the company is anticipating spending at least £500m buying back shares which will come as welcome news to investors.
Bank of America’s Murphy says 'we remain very supportive of Ashtead' whereas Rory McKenzie, analyst at investment bank UBS, is more cautious, saying 'we think FX upgrades are largely priced in already, but underlying trading remains strong'.
Ashtead trades on 15.9 times UBS' forecast 2019 earnings of 147.47p, a discount to peers according to data from Reuters, which trade on an average of 18.4 times.
One issue that might worry investors is the upcoming reshuffle with current CEO Drabble stepping down to be replaced with chief operating officer Brendan Horgan. However Horgan runs US division Sunbelt which has been a success, so this change at the top should not derail the business.