Ashtead still towers above the rest

The Investment Column
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The Independent Online
Ashtead has always stood out in the depressed construction sector. When recession hit in 1990, the plant hire specialist quickly reinvented itself, gradually reducing the amount of direct construction work in the UK from almost 100 per cent to about 25 per cent through a series of acquisitions, mainly in the US, where the rental market is less developed.

It proved to be an inspired move. Unique among rivals such as Vibroplant and Hewden Stuart, Ashtead's profits and earnings have continued to bound ahead, despite hire rates for traditional equipment in the UK such as dumper trucks and compressors being at least 30 per cent below their peak at the start of the decade. In the second quarter rental rates for some products touched record low levels and no pick-up is forecast in the foreseeable future.

Even Ashtead has felt the pinch, with operating margins in UK plant hire slipping by over three percentage points to 17.3 per cent in the six months to October. But a marketing-led approach and decentralised management structure, including an innovative monthly profit share scheme for staff, mean Ashtead continues to grab market share in tough market conditions.

Interim net profits have risen 10-fold in the past five years and the 18 per cent improvement in earnings per share to 7.63p was struck after integrating Ashtead's biggest acquisitions - McLean Rentals in the US and Leada Acrow in the UK - for a rights issue-funded pounds 52m. The figures are all the more impressive because they include just pounds 800,000 from the sale of retired equipment against pounds 5m for the whole of last year, while pounds 5.4m was charged against the profit and loss account for spares and parts against pounds 2.4m in the corresponding period.

The US, currently almost a third of sales, is earmarked for further growth. Peter Lewis and George Burnett, Ashtead's founders, reckon rental rates are twice as high across the pond and the fragmented market there is ripe for consolidation. Ashtead operates out of 26 locations in eight US states but the target is to double this by the spring of 1999.

Mr Lewis and Mr Burnett were so encouraged by the reception they got on a US roadshow in October that they are looking into floating Ashtead on the New York stock market this year.

They note that the sector is developing a following among American investors and two US plant hire groups recently went public on stratospheric price/earnings multiples. Certainly, Ashtead is right to go down this route. Its US business alone could be worth more than Ashtead as a group.

History suggests caution. The problem is the US has proved a graveyard for UK players in the past. A year ago, for example, Vibroplant pulled out of the American plant hire business.

Ashtead, with its proven track record, may fare better. But on BZW's forecast of pounds 29m at the pre-tax level the shares, down 3p at 230.5p, look about right on a PE ratio of 15 falling to 12 the following year. Hold.

Mighty Mitie is cleaning up

When the seasoned investor unearths a company whose acronym stands for "management incentive through investment equity", he could be forgiven the temptation to run a mile. Mitie, a cleaning to building services contractor, is just one of the latest models in the long and chequered history of those claiming to have discovered the holy grail of management motivation. Predecessors have included the ill-fated Cannon Street Investments and Southern Business Group, whose problems were solved by a takeover.

Mitie's own brand involves finding thrusting management teams and wrapping them in a cocoon of administrative, financial and marketing support. This all-embracing parcel is then tied up with a minority stake in the resulting Mitie subsidiary, which can bebought out or swapped for a tax-efficient stake in the top company's quoted shares after five years. Thus far, the formula has been a runaway success: only one of Mitie's managers has elected to sell out of a group which now comprises 47 subsidiaries. More importantly, compound earnings growth has run at 22 per cent since 1990, a record which looks set to be at least equalled in the current year.

Yesterday the group reported a 28 per cent rise in pre-tax profits to pounds 3.25m for the six months to September. After a strong performance on Friday the shares slipped 4.5p to 194p but they are still several times the 34p they were at five years ago.

Mitie looks more solidly based than many of its predecessors at this game. Management, led by the chairman, David Telling, have plenty of experience in the business. They also appear to be vacuuming up business being cast off by the big facilities management groups. Contracts ranging from a pounds 1m job cleaning Barclays branches in the Midlands to refurbishing London's Claridges hotel, expected eventually to be worth over pounds 10m, look juicy.

With less than 2 per cent of some extremely large markets, Mitie also has plenty of opportunity to grow. Margins, around 3.5 per cent, are well on the way to 5 per cent and profits of pounds 8.1m are in prospect for the current year, putting the shares on a forward multiple of 25, falling to 20. Not cheap and the market in the shares is thin, with 60 per cent in management hands, but Mitie could be the next Rentokil.

Outlook rosier

at Budgens

At first glance Budgens is not in an enviable position. Sandwiched between the superstores and the discounters it has lost its primary shoppers to one group and the bargain-hunters to the other. With a market share of just 0.4 per cent it is clearly a minnow among whales and its brand is hardly the strongest.

It is not the rosiest of scenarios but in spite of all this Budgens' future is not as black as it seems. Since management under John von Spreckelsen abandoned the failed Penny Market discount format to concentrate more on fresh foods, Budgens' fortunes have been improving. Even the stormy relationship with German shareholder Rewe, which holds a 29.9 per cent stake, seems to have calmed down.

Yesterday's results continued the consolidation. Half-year pre-tax profits up 17.7 per cent to pounds 5m were in line with expectations and the like-for- like sales increase of 4.5 per cent was creditable. Margins have edged ahead due to buying efficiencies gained through membership of a pounds 3bn buying consortium which also includes Londis and Costcutter.

Budgens now concentrates on offering a convenient high street location for consumers to buy their top-up shops. One of the most interesting parts of its strategy is to develop small stores on petrol forecourts through joint ventures with Q8 and Mobil. Budgens is not alone in this area and some smaller formats of the superstore groups could form formidable competition. But Budgens could steal a march on some competitors as its joint venture deals give it a ready access to good sites.

Finally, if Budgens cannot trade its way to a degree of success, shareholders could benefit from possible speculative interest. At 45.75p, down a penny yesterday, the shares are not at much of a premium to net asset value of 42p. As out-of-town planning restrictionsbite, Budgens' high street locations could eventually prove attractive to a larger competitor. With Henderson Crosthwaite forecasting full-year profits of pounds 8.8m, the shares trade on a forward rating of 13. About right.