Rewarding staff pays off for Ashtead

The Investment Column
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The Independent Online
After a collapse in profits at Vibroplant last week, and in the wake of more than usually gloomy recent statements from Hewden Stuart, no one could really have expected profits from rival plant-hirer Ashtead to have been so buoyant in the year to April, or for chairman Peter Lewis to be so optimistic about prospects.

Profit before tax and exceptional items, up 35 per cent to pounds 18.3m (pounds 13.6m) suggested Ashtead was operating in a completely different market from its two big peers. Earnings per share were an impressive 27 per cent better at 14.3p, at which level they have quadrupled in three years, and the dividend was hiked 24 per cent to 3.07p. It has doubled over the same period.

In some ways it is true that Ashtead is operating in different markets. Unlike its rivals, the company has a sizeable US operation and Mr Lewis expects more than half of profits to come from America. The attraction of the US operation is that rental rates in that fragmented market can be as much as twice as high as in the UK, where recession and competition have knocked yields for six.

Ashtead also has a profitable survey and inspection hire business, based in Singapore, which supplies the offshore oil and gas markets. That and the US mean that Ashtead generates only about 30 per cent of its revenue directly from the UK construction industry compared with pretty much 100 per cent at the beginning of the 1990s.

The real key to Ashtead's success, however, is not the markets it operates in, which are no better or worse than its peers. It is the way it conducts its business, and especially the profit-related pay structures it has built into staff contracts which ensure that every depot is a profit centre and each employee is to a fairly large extent an owner of the business.

Importantly, profit-related bonuses are paid the month after the period to which they relate, which means that staff get a very real and rapid reward for extra effort. That creates a virtuous circle of positive thinking which has been reflected in the first two months of the current year with a 21 per cent rise in like-for-like sales growth despite no overall improvement in the market.

After a one-for-two rights issue in the spring to fund two big acquisitions, there will inevitably be a period of earnings consolidation and certainly growth would appear to be slowing quite markedly this year to perhaps less than 10 per cent, a considerable decline compared with recent periods.

That is likely to put the brakes on the shares, which have grown relentlessly since 1992 to yesterday's 174p, down 1p on the day. On a prospective p/e ratio of about 12, with two big acquisitions to bed in, and with pretty unfavourable sentiment in the sector, that is probably high enough for the time being. A class act, but fully priced.