Morning Note: Market news and an update from Ashtead.
Market News
US equity futures are trading lower this morning after the Labor Day market holiday yesterday – the S&P is currently forecast to open down 0.2% this afternoon. In Asia this morning, the main indices were little changed: Nikkei 225 (flat, even as the yen strengthened to 146 versus the dollar); Hang Seng (-0.4%); Shanghai Composite (-0.3%). Pimco Japan expects the Bank of Japan to raise rates again as early as January and is ready to invest in ultra long-term government bonds.
Traders continue to wait for US data later this week that may offer clues on Federal Reserve rate cuts. In the meantime, the 10-year Treasury yields 3.91%, while gold is steady at around $2,500 an ounce.
The FTSE 100 is currently little changed at 8,368. According to the BRC, UK retail sales were up 0.8% year-on-year in August. Sterling trades at $1.3130 and €1.1870.
The oil price remained subdued at $77 a barrel as China demand concerns offset Libyan disruptions. Goldman has slashed its copper forecast on softening Chinese demand, while the iron ore tumbled below $95. Meanwhile, EDF has boosted it boosted its full-year nuclear power generation estimate for France.
Source: Bloomberg
Company News
Ashtead Group has this morning released results for the first quarter of its financial year to 30 April 2025 and reiterated its full-year guidance. The company also announced the retirement of its CFO. In response, the shares have been marked up 3% in early trading.
Ashtead is a leading supplier of rental tools and equipment in the US & Canada (91% of revenue) and the UK (9%), generating revenue of almost $11bn in FY2024. At the end of July, the group’s rental fleet at cost was $18bn, with an average fleet age of 46 months.
The company represents a good play 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. The market is increasingly broad, with non-construction sectors now accounting for more than 50% of revenue. In North America, the group operates in a fragmented market which it expects to grow from $77bn to $94bn by 2027.
Back in April, the group outlined the latest iteration of its Sunbelt strategy (4.0), a five-year growth plan. Significant investment ($20bn over the next five years) will enable Ashtead to take advantage of substantial structural growth opportunities. The aim is to supplement strong same-store growth with 300-400 greenfield openings and bolt-on acquisitions. As a result, the group continues to broaden its product offering and leverage the benefits of scale to unlock margin progression.
The industry is structurally positioned to deliver sustained rate progression – pricing reflects inflation in the group’s cost base (including skilled labour wages and fleet costs) and added value to customers. Overall, the aim is to deliver strong revenue growth (6%-9% p.a.), improving margins (by 3%-5%) and returns, and strong free cash flow generation. Although listed in the UK, Ashtead reports in US dollars.
In the three months to 31 July 2024, revenue increased by 2% at constant exchange rates (CER) to $2,754m, while underlying rental revenue grew 7% at CER to $2,541m. As expected, lower used equipment sales and a higher increase in depreciation and interest costs resulted in adjusted profit before taxation falling by 7% to $573m.
In North America, the increasing proportion of mega projects and the strength of the group’s Specialty businesses more than offset the lower activity levels in local commercial construction markets.
In the US, rental-only revenue rose 7% to $1727m, driven by both volume and rate improvement, 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 5%, while bolt-on acquisitions contributed 2%. Rental revenue drop-through to EBITDA was 69%.
In Canada, rental-only revenue grew 21% to C$180m driven by a recovery in the Specialty Film & TV business after last year’s strike action. In a manner similar to the US, growth was driven by volume and rate improvement. The UK business generated rental-only revenue of £124m, an increase of 3%.
During the latest quarter, capital expenditure was $855m across existing locations and greenfield sites. $53m was spent on two bolt-on acquisitions, while 33 locations were added in North America. Free cash flow was $161m. Financial gearing ended the period at 1.7x net debt to EBITDA, at the upper end of the group’s target range of 1.0x-2.0x.
The group operates a progressive dividend policy – in FY2024, the company paid out 105c (1.5% yield). An amount is then allocated to share buybacks based on availability after organic growth, bolt-on acquisitions, and dividends within the target leverage range.
The group expects results for the financial year to 30 April 2025 to be in line with previous expectations: rental revenue growth of 5%-8%; gross capital expenditure of $3.0bn-$3.3bn; and free cash flow of $1.2bn.
Source: Bloomberg