FTSE 100 member Ashtead Group PLC (LSE:AHT, Financial) is an international equipment rental company focused on industrial and commercial users mainly in the non-residential construction sectors in the U.S. and the U.K., and a small presence in Canada. Its stock has been on a tear for the last year. It's owned by gurus Max Ward and David Herro (Trades, Portfolio).
With 86% of revenue currently coming from the U.S., Ashtead has really benefited from the strong U.S. economy in recent years. Its share price has accelerated since last July. Why?
In the near term, there has been great optimism around President Biden’s $2 trillion infrastructure plans, so it looks like the market has been pricing this in ahead of time.
It is plain to see that U.S. infrastructure needs to be upgraded and, therefore, the outlook for U.S. construction activity over the next several years should be extremely good. However, this probably isn’t the main reason for Ashtead’s performance because the infrastructure we are talking about is probably in the heavy category, which would be better for construction and materials stocks like CRH PLC (LSE:CRH, Financial).
Ahstead’s substantial growth comes from its efforts to diversify by geography, product type and markets served as equipment hire markets are still highly fragmented. The chart below from a recent earnings presentation demonstrates the expansion in the U.S. quite well. It has also helped that management focused its efforts more in the defensive end markets that give it a much broader customer base.
Source: Ashtead Group
The market leader in the U.S. is United Rentals Inc. (URI, Financial) with 14% share, while Ashtead has a 10% share. Management have declared its ambition to get to 15% market share in the medium term and 20% in the long term.
Ashtead has 936 stores in the U.S. as of April, compared to 393 in 2010. The growth came through both mergers and acqusitions as well as organic expansion. It is targeting a total of 1,234 locations by April 2024, a 32% increase. As new stores take around seven years to reach maturity, this provides a clear runway for an extended period of growth.
Since 2012, Ashtead’s Ebitda has grown from 380 million pounds ($526 million) to 2.3 billion pounds and the company has spent 2.4 billion pounds on acquisitions. Meanwhile, leverage has fallen. The company in May reintroduced its share buyback program for up to 1 billion pounds. Ashtead also increased its dividend for the 16th consecutive year.
Source: Ashtead Group
For most of the last 10 years, its enterprise value-Ebitda ratio has been in the 6 to 7 times range as the market saw the stock as highly cyclical. Since the valuation has shifted up to 12 times as Ashtead’s management has shown pricing discipline and has been returning very high free cash flow, it appears the market now sees the company as a structural growth story.
Potential reorganization as a catalyst
What is very interesting is Ashtead recently changed its presentational currency to U.S. dollars from pound sterling.
As the company’s revenue and profits are dominated by the U.S. market, this will result in a bmore accurate reflection of underlying performance, closer alignment with earnings and asset base and reduced earnings volatility. All of this reduces the risk of the business and can help keep the new valuation multiple at a higher level than its previous base.
This also paves the way for a potential breakup of the company. Just like fellow FTSE 100 member Ferguson (LSE:FERG, Financial) (FERG), who sold its U.K. operations Wolseley to private equity and introduced a secondary listing on the New York Stock Exchange with the goal of earning a higher multiple. This followed activist guru Nelson Peltz (Trades, Portfolio)’s campaign two years ago. For now, Ferguson keeps its primary listing in London, but it has switched its accounting from international financial reporting standards to U.S. generally accepted accounting principles.
Ashtead could potentially do the same, sell or demerge its non-U.S. assets and relist in the U.S. This would enable it to take on more debt and increase its return on equity. It seems U.S. investors are more comfortable with debt than their U.K. counterparts. This could spur a new rerating for Ashtead.
In the meantime, Ashtead is focused on its new strategic growth plan called Sunbelt 3. This plans has five key pillars: grow general tool and advance our clusters, amplify specialty, advance technology, lead with ESG and dynamic capital allocation.
Source: Ashtead Group
Conclusion
I will be watching Ashtead closely, as I’m particularly interested in any potential corporate reorganization that could create value through a demerger or change of listing. With an Altman Z-Score of 3.8, the company is in strong financial condition, and a Piotroski F-Score of 5 is OK, but despite being held by two gurus I respect greatly, I’m holding off on investing in Ashtead for now as I would like to see its valuation closer to United Rentals, which has an enterprise value-Ebitda ratio of 8.7, before I pull the trigger.
I’ll be waiting for Ashtead's first-quarter trading update in early September.
