Lean times build plant hire builds on bad

BUILDING industry gloom is not universal. Strange to relate, some companies are doing well and even benefiting from the hard times. Peter Lewis, chairman of the Surrey plant hire specialist Ashtead Group, says his company would not be as strong as it is today if the "mother of recessions" had not hit the construction industry, weakening the competition.

The Bolton-based Allen has also capitalised on rivals' distress to make acquisitions, building its tool hire division into a leading player and buying construction contracts from companies in receivership.

Both these companies are achieving dramatic profits growth and can expect the good times to continue as the construction industry cycle turns up later in the decade.

Ashtead is a phenomenal performer. In May 1984, when Mr Lewis and George Burnett gained control through a management buy-in, the group had pre- tax profits of £75,000, employed 60 people, and operated from five locations. Eleven years later, it operates from 107 depots in three continents with more than 1,200 employees, and profits are expected to top £17m in the financial year which began this month.

Mr Lewis ascribes much of this success to the way the group reacted to recession. Hire and utilisation rates plummeted in the early 1990s, which meant sharply falling profitability, even for Ashtead. Operating profits fell from 30 to 9 per cent of sales at the worst point. But not only did the group continue to use its depreciation-boosted cash flows to invest in new equipment, it took the seemingly outrageous risk of doubling its sales force. The gamble paid off in spades, as a beleaguered construction industry turned increasingly to hiring to conserve precious cash.

When, in late 1993, the management decided that the economy was finally emerging from recession, the company moved into overdrive with a chunky rights issue to create a war chest and a string of acquisitions to build the network. The benefits are being reaped with profits doubling or more in three successive half-year accounting periods. Equally impressive is the tidal wave of cash pouring into the group. A stock of more than £100m of plant for hire means the group has a hefty depreciation charge, helping generate cash flow expected to total between £35m and £40m in the current year.

This puts the group in a marvellous position to capitalise on the continuing consolidation of a fragmented industry. Many smaller operations have been battered by recession and, with finance hard to come by, are under pressure to sell. Ashtead should be able at least to double its market share, and improve profitability significantly, pointing to years of strong growth to come. On a prospective price-earnings ratio under 15 for the year just ended, falling to around 12 for 1995-96, the shares look significantly underpriced at 451p.

Allen is even cheaper, but not as excitingly focused as Ashtead on the buoyant plant hire market. Based in the North-east, with a canny and long- established management team led by the executive chairman, Don Greenhalgh, the £55m group has interests ranging from plant hire to construction, house-building, civil engineering, and property development.

After pre-tax profits fell from £5.25m to £1.51m between 1991 and 1993, results due on 26 June for the year to March should see the group back to profits approaching a record £6m. That will give earnings per share of 13p and a p/e of 13 at 170p. This should fall towards 10 if profits beat £7m for the current year.

The driving force behind the growth is an inspired expansion of the tool hire business, which Mr Greenhalgh says is enjoying excellent trading. He says there are slight signs of an improving trend in house-building, construction and commercial property development. If these divisions improve while tool hire continues strongly, then the middle 1990s could be a vintage period for the group. The shares, with the additional appeal of an above-average yield around 4.5 per cent, look attractive.