16.06.2020

Fair result from Ashtead

Ashtead, owner of Sunbelt Rentals in the USA, Canada and now the UK, has reported group revenues for the full year to the end of March of £5.05 billion, 12 percent higher than last year, three percent of which was due to exchange rate movements related to the weakness of Sterling. Pre-tax profits however dropped around 7.5 percent to £982.8 million.

The revenues were made up of Sunbelt USA which saw sales increase 10 percent to $5.49 billion, with an operating profits of $1.56 billion, marginally higher than last year. The results include 10 percent growth in rental in North America, with the US adding 85 new stores during the year, almost half of which were specialty locations. The fourth quarter revenues were just two percent higher as the effects of Covid-19 began to bite.

Revenues at Sunbelt Canada increased 22 percent to $421million, thanks largely to acquisitions, while operating profits were very marginally lower. Canadian rental revenue increased 30 percent, of which eight percent was organic, with the rest down to acquisitions.

In the UK, A-Plant – now Sunbelt Rentals UK – reported slightly lower revenues, declining 1.5 percent to £469.2 million, while operating profit was almost halved to £36.4 million. Rental revenues were two percent lower at £349 million due to a two percent reduction in utilisation.

Gross capital expenditure for the year was almost eight percent lower at £1.48 billion, or £1.21 billion net of fleet disposals – a reduction of 12 percent. The average age of the fleet as of the end of March was 36 months, up from 34 months at the same time a year earlier. The company also spent £453 million on 18 ‘bolt-on’ acquisitions during the year. The company is now forecasting to cut capital expenditure to £500 million this year, although it does say that it will flex this upwards if market conditions allow. It will also keep a lookout for more bolt-on acquisitions.

Chief executive Brendan Horgan said: “I am extraordinarily proud of, and grateful for, our team members and their response during a time when our communities were in need. All levels of the organisation quickly adapted our operations to continue servicing our customers while keeping our leading value of safety at the forefront of all we do. While no one could have foreseen the global impact of Covid-19, our business model and capital structure are designed to withstand the cyclical nature of some of our end markets. We took prompt actions to optimise cash flow, reducing capital expenditure and operating costs, and strengthen further our liquidity position. In these unprecedented times, the results of our long-term strategy to mature our business through diversity and scale came through in our performance.”

“Looking forward, I am certain these swift actions combined with the strength of our cash flow and balance sheet will serve the group well. The diversity of our products, services and end markets coupled with ongoing structural change opportunities put the board in a position of confidence to look to the coming year as one of strong cash generation and strengthening our market position. Based on this confidence, the board has decided to maintain its progressive dividend policy and to recommend a final dividend of 33.5p.”

Vertikal Comment

This is a relatively good performance from Ashtead, although clearly it only includes two to three weeks or so of Covid-19 impact. However the comparative year of 2019 was a very strong year with all the hurricane damage in North America providing an extra boost to revenues, so to have exceeded that was a success in itself, and to do so with all of the fourth quarter uncertainty is even better.

The first half results later in this year are likely to provide the best overview of the impact of the pandemic, although by then the company might well have taken the opportunity to have made a few attractive acquisitions.

In the meantime it will need to watch the capital expenditure situation, cutting back to around £500 million equates to an 18 year full fleet replacement period... while that is not necessarily a very meaningful number, it does provide a simplistic feel for how fast the feel will age at this level of capital expenditure. Especially as the group also runs a lot of small equipment which has the be replaced on a far more frequent basis. At 36 months the fleet is in good shape but from here on out maintenance and break down costs begin to rise, as will customer dissatisfaction. Ideally the business needs to be spending at least three times the proposed level for this year, and cutting it by a third, even just for a year will require it to be even higher in subsequent years. And given good deals can be cut and low interest rates one wonders if this is not a good time to be renewing the fleet, especially as others will be following the lead of cutting back on investment?