Ashtead Earnings: Growth Investments Support Impressive Earnings Increase; Fair Value Maintained

No-moat Ashtead AHT reported 22% rental revenue growth during its 2023 financial year, the midpoint of its guidance, which had been upwardly revised during the previous three consecutive quarters. Free cash flow of $531 million was ahead of our $300 million estimate but mostly driven by the late delivery of certain fleet equipment; thus, free cash flow is expected to decline to $300 million during the current fiscal year. Management has guided for 13%-16% rental revenue growth, of which one third relates to price increases. The anticipated decline in full-year free cash flow year over year despite double-digit revenue growth highlights the capital intensity of the business, which requires incremental additions of capital investment to grow. While we plan to revise our forecasts, we reiterate our GBX 4,350 fair value estimate. The shares appear fairly valued.

U.S. rental revenue (approximately 80% of group revenue) grew 24%, boosted by both greenfield and bolt-on store expansion. Ashtead spent $1.1 billion on 50 acquisitions during the year, helping bolster its store count by 165 in North America. Given the largely fragmented nature of the industry, we expect this theme to continue. Ashtead is using acquisitions to expand its equipment fleet in anticipation of several large U.S. infrastructure and nonresidential projects that have longer rental duration and a healthy outlook. EBITDA grew in line with revenue as price increases and higher utilization rates offset inflationary pressures.

Net debt/EBITDA of 2.0 times remains within the group’s target, allowing Ashtead to continue to pursue its acquisitive strategy. Capital return is also prevalent, with $635 million being returned to shareholders via a combination of dividends and buybacks.