Morning Note: Market news and an update from rental company Ashtead

Market News

US equity markets drifted lower last night – S&P 500 (-0.1%), Nasdaq (-0.4%). AMD hit a roadblock in attempting to sell an AI chip tailored for China, people familiar said. US officials told AMD that the chip was still too powerful and that the company must obtain a license to sell it.

This morning in Asia, markets were mixed – Nikkei 225 (flat); Hang Seng (-2.7%, on the AMD report); Shanghai Composite (+0.3%) – as China’s new targets and measures to build confidence in its economy received a lukewarm response from investors. The country will set a growth target of around 5% for the year, raising expectations of more stimulus, though Premier Li Qiang acknowledged the challenges. Beijing is also targeting unemployment of about 5.5% in 2024, while defence spending is set to increase by 7.2%, the most in five years.

The FTSE 100 is currently trading 0.2% lower at 7,610. Spirent is trading 58% higher following a recommended cash offer for the company from Viavi. The 175p bid is 61.4% above last night’s close.

The Fed’s Raphael Bostic said he expects the first US rate cut, which he’s penciled in for the third quarter, will be followed by a pause. The 10-year Treasury yields slipped back to 4.20%, while gold enjoyed another strong session and now trades at $2,115 an ounce, a record high. Bitcoin also hit a record high and now trades at $66,600.

UK retail sales grew at their slowest pace in 18 months, with the industry blaming rainy weather for keeping shoppers away. Like-for-like sales growth of 1.0% in February was below the 1.6% expected. The UK is seen selling fewer long bonds amid dwindling demand. The government is expected to announce a target of £258bn in gilt sales for the coming fiscal year, according to a Bloomberg survey, with the share of long-dated debt forecast to fall to 19% from 22% in March 2023. Sterling trades at $1.2681 and €1.1687.

Source: Bloomberg

Company News

Ashtead Group has this morning released results for the first nine months of its financial year to April 2024. Although the company highlights its end markets remain robust, it has trimmed its full-year revenue guidance. In response, the shares have been marked down 6% 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 of infrastructure spend by Western governments seeking to stimulate economic growth via fiscal means and the shift in the market from owning to renting equipment.

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.

During the nine months to 31 January 2024, revenue increased by 14% at constant exchange rates (CER) to $8.2bn, with growth slipping to 9% in the third quarter. Underlying rental revenue grew 11% at CER to $7.3bn, with growth of 7% in the third quarter.

As outlined previously, the group’s third quarter rental revenue growth in North America was affected by the lower level of emergency response activity related to natural disasters and the longer than anticipated actors’ and writers’ strikes.

In the US, rental-only revenue of $5.0bn was 12% 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 9%, while bolt-on acquisitions contributed 3% of rental-only revenue growth. Growth was driven by both volume and rate improvement. 

In Canada, rental-only revenue grew 10% to C$457m driven by strong volume growth and rate improvement. The UK business generated rental-only revenue of £350m, an increase of 9%.

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 to support profitability. US rental revenue drop through to EBITDA was 51%, with Q3 only 44%. Group adjusted pre-tax profit was little changed at $1,785m, held back by higher interest costs.

As expected, investment in the business, both organic and inorganic, rose sharply. During the latest quarter, capital expenditure increased from $2.6bn to $3.5bn across existing locations and greenfield sites.  The step-up in spend meant the group endured a free cash outflow of $463m, versus an inflow of $295m last year. $906m was spent on 26 bolt-on acquisitions, adding 106 locations in North America during the quarter. Financial gearing ended the period at 1.9x net debt to EBITDA, at the high end of the target range of 1.5x-2.0x.

Considering Q3 performance in North America, the group now expects rental revenue growth for the full year to 30 April 2024 to be at the low end of its 11%-13% range and full-year results broadly in line with expectations. Free cash flow is still expected to be around $150m. Looking to 2024/25, the group has highlighted its initial plan for gross capital expenditure of $3.0bn-$3.3bn, a decline from the $4.2bn expected this year. In addition, the group will launch its next strategic growth plan, Sunbelt 4.0, at its capital markets event in late April.

Source: Bloomberg