Morning Note: Market news and results from Ashtead.

Market News

US equity markets fell last night – S&P 500 (-0.5%); Nasdaq (-0.8%) – as traders pared aggressive bets of a Fed pivot ahead of a slew of key jobs readings over the next few days. Markets in Asia followed suit this morning in Asia – Nikkei 225 (-0.8%); Hang Seng (-2.1%); Shanghai Composite (-1.7%) – after the release of services data in China.

The FTSE 100 is currently trading 0.4% lower at 7,480. Qatar’s wealth fund offloading almost half of its shares in Barclays. The sale raised £510m and is a surprise move by the bank’s top investor as the Barclays executives ready a strategic overhaul for early next year.

Gold is currently trading at around $2,035 an ounce after facing heightened volatility over the last couple of days, where it surged more than 3% to above $2,130 before a dramatic reversal to close 2% lower around $2,030. Those moves came as expectations grew that the US Federal Reserve would hold interest rates steady during this month’s meeting and could start cutting rates next year.

The 10-year Treasury currently yields 4.24%. Eurozone money markets are pricing in an 84% chance of a rate cut in March, versus 72% on Monday. Bunds yields trade at 2.27%, having peak at around 3% as recently at the end of September.

UK retail sales grew by 2.7% year on year in November as Black Friday discounts failed to lure a big boost, the BRC and KPMG said. Sales of non-food items declined, with shoppers particularly avoiding expensive categories including jewellery and watches. Sterling currently trades at $1.2620 and €1.1660.

Source: Bloomberg

Company News

Ashtead Group has this morning released its results for the half-year ended 31 October 2023. This follows the recent unscheduled update in which the company revised down its guidance. In response to today’s news, the shares have been marked down by 3% 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.

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 six months to 31 October, revenue increased by 16% at constant exchange rates (CER) to $5.6bn, with growth slowing to 13% the second quarter of the period. Underlying rental revenue grew 13% at CER to $5.0bn, and by 11% in second quarter.

As previously disclosed, despite robust end markets, ongoing structural drivers, and a record operating performance, revenue in October was affected by lower levels of emergency response activity with a significantly quieter hurricane season than seen in recent years and fewer naturally occurring events, such as wildfires, with this effect continuing into November.

In addition, the writers’ and actors’ strikes, which have impacted the group’s Film & TV business in Canada significantly, have persisted for longer than anticipated with some impact on the rest of the Canadian, US, and UK businesses that rent into that space. This also continued into November.

In the US, rental-only revenue of $3.38bn was 15% 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 11%, while bolt-on acquisitions contributed 4% of rental-only revenue growth. In Canada, rental-only revenue grew 11% to C$310m driven by strong volume growth and rate improvement. The UK business generated rental-only revenue of £239m, an increase of 11%.

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 profit growth. US rental revenue drop through to EBITDA improved to 53%. Group adjusted pre-tax profit grew by 5% to $1,312m, held back by higher interest costs.

As expected, investment in the business, both organic and inorganic, rose sharply. During the half-year, capital expenditure increased from $1.7bn to $2.5bn across existing locations and greenfield sites. The step-up in spend meant the group endured a free cash outflow of $355m, versus an inflow of $154m last year. $705m was spent on 16 bolt-on acquisitions, adding a combined total of 74 locations in North America during the year. The dividend was raised by 5% to 15.75c. Financial gearing ended the period at 1.8x net debt to EBITDA, in the middle of the target range of 1.5x-2.0x.

The group lowered its guidance for the full year to 30 April 2024 at the time of November’s update. Group rental revenue growth is expected to be in the range of 11%-13%, with free cash flow of $150m. Despite the one-off events impacting the current financial year, the group highlights that its end markets in North America remain robust, supported in the US by an increasing number of mega projects and recent legislative acts. This means the company looks to the future with confidence.  

Source: Bloomberg