Construction upturn set to profit Ashtead

The Investment Column
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Ashtead has appeared to defy gravity since reinventing itself as an "outsourcer" of industrial equipment in the early 1990s. Over the past five years it has roughly quadrupled its share of the non-operated plant hire market to 14 per cent, making it the biggest in the UK, despite one of the deepest building slumps since the War. And its pure rental profits, stripping out equipment sales, now put it ahead of Hewden-Stuart, the grand old man of the industry.

As Ashtead founders Peter Lewis, chairman, and George Burnett, managing director, were reminding their investors yesterday, shareholders have enjoyed a 50 per cent compound annual growth in returns over the same five- year period.

The occasion for all this crowing was the announcement of a 68 per cent rise in profits to pounds 28.3m for the year to April. The figures were undoubtedly boosted by acquisitions, of which the main ones were McLean in the US and Leada Acrow in the UK, acquired for pounds 35m in February 1996. Leaving those aside, along with some smaller purchases during the past year, nearly half the 54 per cent jump in sales to pounds 148m was generated from existing operations.

So even if much of Ashtead's extraordinary expansion has been acquired, it has also proved itself capable of growing the business. Much of that is due to heavy investment, backed by prodigious cash flow, at a time when rivals have not had the balance sheet strength to gear up. Last year saw capital expenditure on plant rise 23 per cent to pounds 94.5m, with some 60 per cent of that covered by cash flow of pounds 57.4m. With a similar sort of expenditure pencilled in for the current year, Ashtead, as one of the few large players to emerge in plant hire, should be well placed for an upturn in a building and construction sector which has increasingly divested its own plant and equipment.

The group has had little help from any revival in the market thus far. Rental rates slipped another 5 per cent last year, leaving them some 30 per cent below 1989 levels, and operating margins in the UK fell from 18.8 to 17 per cent. But, significantly, Ashtead pushed through its first price rises for around eight years in April and, although small, they appear to be sticking.

With the fashion to outsource gathering momentum and the water, gas and electricity industries starting to spend again, the UK background looks better than it has for some time. Meanwhile, in the US, where growth in an underdeveloped market is forecast at 20 per cent this year, the prospects appear even better.

Profits from Sunbelt, which operates in seven south-eastern states, nearly tripled from pounds 4.1m to pounds 11.7m last year. Mr Lewis reckons they can more than triple the company's profit centres from 30 to 100 before moving into Texas and also possibly the West Coast.

Meantime, group profits of pounds 34.5m this year would put the shares, up 10p to 302.5p, on a forward multiple of 16. Still reasonable value.

Currency fears knock Ellis

Chemicals group Ellis & Everard has come back down to earth with a bump in the last six months. For four years from 1993-96 the company saw its shares bound ahead as a series of small acquisitions combined with decent organic growth to restore profits after a setback in 1992. The company has gradually carved out a niche buying bulk chemicals, breaking them down and supplying smaller companies which the big manufacturers choose not to supply directly

But this year Ellis & Everard shares have lost almost 25 per cent of their value, falling from a high of 320p in January to 240p, up 1.5p yesterday. What happened? Most of the collapse seems to have been due to negative sentiment surrounding the sector as a result of currency concerns. This is a bit harsh on Ellis, which does not have much of an export business. However, profits from its low margin US operations are at risk from the currency impact of translating them from dollars. Another factor depressing the shares was a broker shifting a big line of stock a few weeks ago.

Profits for the year to April were 16 per cent ahead at pounds 29.6m, which was in line with expectations. The strength of sterling knocked pounds 500,000 off profits in the second half of the period and, if rates remain broadly unchanged, the hit will be about the same in the first half of this year.

Eight acquisitions in the last financial year took Ellis further into the US, which already accounts for a half of group sales. Yesterday it announced the acquisition of Mozel, a speciality chemicals distribution group for pounds 13.1m. Though the operating margins are poor - pounds 1.3m profit on pounds 62m of sales - Ellis chief executive Peter Wood reckons it can improve margins to 3 per cent.

Ellis & Everard will remain vulnerable to the current jitters about the chemicals sector. But it is a well-managed business which has shown itself prudent in both cost-cutting and acquisitions. On Kleinwort Benson's current year forecast of pounds 34m, the shares trade on a forward rating of just over 9. While the stock may tread water in the short term due to the strong pound, this lowly rating could make them an attractive, low-risk bet.

Ascot to start Suter sell-off

Investors expected great things of Ascot when Howard Dyer arrived as chairman. Mr Dyer had built up a strong City following as a successful director of Williams and then at toy retailer Hamleys, where he was credited with turning round a group which seemed in terminal decline. So his first big acquisition at Ascot, the pounds 277m purchase of mini-conglomerate Suter last summer, was greeted with some optimism.

Since then, however, the shares have lost their gloss, falling by more than a third. Ascot has plenty of reasons to explain the fall. Conglomerates, especially small ones, have fallen out of fashion with investors it says. Former Suter shareholders who received part of their payment in Ascot shares have also been selling their stakes. And Mr Dyer recognises Ascot's price had got ahead of itself, trading well above net asset value.

The fact remains that Mr Dyer has done very little with Suter's businesses so far. A few of Ascot's old assets, such as hotels and pubs, have been sold but big disposals have been conspicuous by their absence.

That is about to change. Rico, its South African fridge business, Presto, which makes cutting tools and Depilex, which sells beauty therapy equipment, are likely to go within the next few months. The car parts division is likely to be sold within the year.

That will leave Ascot as an engineering and chemicals business and when the dust settles Mr Dyer plans to hit the acquisition trail. Yesterday he hired another city heavyweight, former LucasVarity finance director John Grant, as chief executive to help him get on with the job. It looks a sound appointment. After all, Mr Grant in effect ran LucasVarity for the best part of a year when George Simpson ran off to join GEC.

Kleinwort Benson forecasts current year profits of pounds 28m, putting the shares, up 6p to 238.5p yesterday, on a prospective p/e ratio of 9. Mr Dyer needs to make a decent acquisition to return Ascot's share price to its former glory. That said, the shares have probably reached the bottom and should begin to recover as the sell-off starts. Good value.