Ashtead CEO Looks to Steady U.S. Recovery to Double Market Share
Ashtead Group Plc (AHT), the FTSE All-Share Index (ASX)’s best performer over four years, said it has the tailwind to grow sales “aggressively” for several years as the U.S. market for rental equipment benefits from tight credit and steady growth.
“A slow market with difficult credit conditions accelerates our gain in market share and the switch to rental,” Chief Executive Officer Geoff Drabble, 53, said in an interview ahead of tomorrow’s announcement of results for the year ended April. “Low, steady growth is the perfect environment for us.”
The increased use of rental equipment by cash-strapped house builders and construction companies, coupled with the recent recovery in the U.S. housing market, has boosted Ashtead’s share price almost 12-fold since the start of June 2009. The U.S. economy grew 2.2 percent last year and may cool to grow 1.9 percent this year while annualized sales of new homes rose in April at the second-fastest pace in almost five years.
“Right now I think we are about six to nine months into that perfect two years where you get a little bit of recovery in the market and you get the structural change,” Drabble said. “We have always known our profit was going to grow and our revenue was going to grow. It has probably grown a little bit faster than we expected.”
That helped London-based Ashtead beat analysts’ estimates for revenue for the last 12 quarters and allowed it to raise its profit forecast for each of the past seven. Ashtead will report fiscal full-year pretax profit of 234 million pounds ($369 million), according to the average estimate in a Bloomberg survey. That’s 75 percent higher than the record from a year earlier.
“Ashtead has many years of super-normal growth ahead,” Justin Jordan, an analyst at Jefferies Group LLC with a buy rating on the stock, said by telephone. “The message that you don’t need to tie up capital is getting increasingly ingrained into the psyche.”
The group has scope to double its business just by having a “mid-teens” market share, compared with the 6 percent it has now, said Drabble, who has been CEO since the start of 2007. In each of the past two years, revenue has jumped about 20 percent, compared with 7 percent for the industry as a whole.
“We’re already at peak profits,” the CEO said. “Our starting point is our previous high point. Where we are now, these ought to be our new bottom of the cycle profits not our new top of the cycle profits. That’s the bit I don’t think people have quite got their heads around.”
The economic downturn and resulting credit crunch has already resulted in rental market penetration increasing to about 50 percent as companies reallocate scarce capital. That will likely rise to about 65 percent, while construction output needs to rise by about 60 percent just to match its previous 2006 peak, Drabble said.
Sunbelt Rentals, Ashtead’s Charlotte, North Carolina-based unit that accounts for about 95 percent of sales has been helped by United Rentals Inc.’s (URI) $2.5 billion acquisition of RSC Holdings Inc. last year. That resulted in its larger rival focusing less on growing market share, Drabble said. United closed the equivalent of 50 percent of Sunbelt’s business in the past year, shuttering about 200 locations, he said.
Some analysts think Ashtead needs to increase spending to justify the current share price, which has surged 167 percent in the past year and closed yesterday at 623 pence. Market capitalization of almost 3.2 billion pounds means it’s close to entering the benchmark FTSE 100 Index.
Even with 1 billion pounds more than currently expected in capital spending over the next three years, net debt would be below target, Mark Howson, an analyst at Oriel Securities Ltd. who recommends investors buy the stock, said in a note.
Drabble expects construction output to match previous highs in coming years, with housing playing a less prominent role and non-residential construction exceeding 2006 levels, helped by shale-energy development and associated hydraulic fracturing or fracking.
“I have got enough tailwinds that my revenue should continue to grow aggressively for a number of years unless we do something seriously stupid,” Drabble said. ’’We are like a supertanker. Once we start heading in the right direction we are hard to stop.’’
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