Market news and an update from equipment rental company Ashtead.
Market News
China’s services sector activity expanded at the slowest rate this year in August, adding to concerns about whether a major engine for this year's recovery is losing traction. The Caixin services PMI fell further than expected to 51.8 from 54.1 in July. While the reading is still above the 50 line that separates expansion from contraction, it was the weakest pace since December. In response, equity markets were subdued this morning: Nikkei 225 (+0.3%); Hang Seng (-1.9%); Shanghai Composite (-0.8%). The FTSE 100 is currently trading 0.7% lower at 7,402.
Goldman now forecasts a 15% chance the US will slide into recession, down from 20% previously and a Bloomberg consensus of 60%. Real disposable income may reaccelerate in 2024 on job growth, economist Jan Hatzius said. He expects the drag from Fed policy tightening “vanishing entirely” by early 2024. The 10-year Treasury yield edged up to 4.21%, while gold slipped to $1,936 an ounce.
UK same-store sales rose 4.3% year on year in August, according to the British Retail Consortium. Sterling currently trades at $1.2578 and €1.1681.
Brent Crude $88.20 a barrel. The global oil market faces a “large deficit” of 2.3m barrels a day this quarter after OPEC+ cuts, prompting the summer rally in prices, Goldman said. It expects Saudi Arabia will keep its output flat in October, stepping back from an earlier forecast that Riyadh may taper its voluntary 1m b/d reduction.
Iron ore has risen to its highest level since April, while wheat gained after Putin said he wouldn’t revive the grain deal. Chevron’s Australian LNG facilities workers threatened partial strikes from Thursday, followed by full stoppages a week later amid a pay dispute.
Company News
Ashtead Group has this morning released results for the first quarter of its financial year to 30 April 2024. The group enjoyed a strong quarter with ongoing momentum in robust end markets. Although full-year guidance was reiterated, within the mix the UK forecast was lowered. In response, the shares are down 5% in early trading.
Ashtead is a leading supplier of rental tools and equipment to the non-residential construction industry in the US & Canada (91% of revenue) and the UK (9%). The company represents a good play on the prospect on infrastructure spend by Western governments seeking to stimulate economic growth via fiscal means and the shift in the market from owning to renting equipment. In the US, for example, growth is being enhanced by the increasing number of mega projects and recent legislation. The rental fleet on 31 July 2023 at cost was $17bn and the average fleet age was 33 months.
Significant investment is enabling Ashtead to take advantage of the substantial structural growth opportunities. The strategy is to generate growth through strong same-store growth supplemented by greenfield openings and bolt-on acquisitions. As a result, the group continues to broaden its product offering and leverage the benefits of scale. Although listed in the UK, Ashtead reports in US dollars.
In the three months to 31 July, revenue increased by 19% at constant exchange rates (CER) to $2.7bn. Underlying rental revenue grew 14% at CER to $2.4bn.
In the US, rental only revenue of $1.6bn was 16% higher than the prior year, representing continued market outperformance and demonstrating the benefits of the group’s strategy of growing its specialty businesses and broadening its end markets. Organic growth (same-store and greenfield) was 13%, while bolt-on acquisitions contributed 3% of rental-only revenue growth.
In Canada, rental-only revenue grew 14% to C$149m driven by strong volume growth and rate improvement. However, strikes are having a significant impact on the performance of the Film & TV business.
The UK business generated rental-only revenue of £120m, an increase of 15%. However, excluding the impact of the work for the Department of Health, which ended during the first quarter of 2022/23, rental only revenue increased 18%.
In common with many businesses, Ashtead has faced inflationary pressures across most cost lines, but particularly in relation to labour. However, strong performance on rate, combined with the group’s scale, has enabled Ashtead to navigate this inflationary environment, driving strong revenue and profit growth. This has resulted in US rental revenue drop-through to EBITDA of 53%.
Group adjusted pre-tax profit grew by 11% to $615m, a touch above the market forecast of $609m. The lower rate of growth (vs. revenue) reflects an increased net financing cost due to increased average debt levels and the higher interest rate environment.
As expected, investment in the business, both organic and inorganic, rose sharply. During the latest quarter, capital expenditure increased from $699m to $1,132m across existing locations and greenfield sites. The step-up in spend led to a free cash outflow of $139m, vs. an inflow of $91m last year. $361m was spent on nine bolt-on acquisitions, adding a combined total of 40 locations in North America during the quarter. Financial gearing ended the quarter at 1.6x net debt to EBITDA, at the low end of the target range of 1.5x-2.0x.
Looking forward, the group believes it is in a position of strength, with the operational flexibility to capitalise on the opportunities arising from strong markets and ongoing drivers of structural change, including supply chain constraints, inflation, and labour scarcity.
For the financial year to 30 April 2024, the group has lowered its guidance for the UK as market conditions soften. Rental revenue growth is now expected to be 6%-9% vs 10%-13% previously. However, given the size of the division, the impact on the overall group is minimal and total guidance has been reiterated: rental revenue growth of 13%-16%, capital expenditure of $3.9bn-$4.3bn, and free cash flow of c. $300m.