Shares: High times for hire: The survivors in the equipment rental sector are ready to surge ahead on recovery

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The Independent Online
IT IS increasingly apparent that some economic recovery is taking place. My guess is that it could prove stronger than the pundits expect, with UK economic growth in 1994 and 1995 up to the best levels of the 1980s, or better. Even if that is over the top, a sector which could perform brilliantly given almost any sort of recovery is plant hire, where a dramatic contraction in capacity has left the stronger survivors well placed for a bonanza.

Some idea of the potential was provided in recent results from a long-time favourite of this column, Dawsongroup, the truck rental concern. In 1991, there had been fears that the group was heading for disaster. Those worries were way off the mark. Helped by an 80 per cent increase in first-half profits, the shares are up more than 10-fold on my original 30p recommendation price in June 1991. The thinly traded shares jumped 60p on the results announcement but still look cheap at 317p. Even before significant economic recovery, 1993 profits are heading for a record pounds 7.5m, with a probably conservative pounds 9m pencilled in by analysts for next year to drop the p/e on a low tax charge to the mid teens.

Readers may wonder how this is being achieved given the dire state of the truck market. Part of the answer is that Dawsongroup has reacted quickly to problems and made intelligent choices, such as moving into the trailer and portable cold-store rental markets. But it has also benefited from a phenomenon that promises to work wonders for the equipment rental sector.

The recession has taken a huge amount of capacity out of the market, both through sales of second-hand equipment into stronger overseas markets and through the collapse of new equipment sales. The result is that even a hint of recovery can quickly lead to hardening rates, as Dawsongroup has found with the short-term truck rental market. In the past six months, it matched the revenue for the same period last year, but with a fleet 8 per cent smaller, enabling it to report dramatically improved profits.

A re-run of this exciting process now seems probable in the construction equipment and plant hire business where two companies, Glasgow-based Hewden-Stuart at 134 1/2 p, and Surrey-based Ashtead at 273p - the number one and number three players in the industry - look well placed. Vibroplant at 79p, the number two, was hit earlier in the year by a profits warning, reflecting the dire state of the access equipment market in the US and bad debts in the UK. Even so, its shares will probably participate in the recovery and have already rallied well from a low of 47p.

Both Ashtead and Hewden-Stuart have weathered the recession with astonishing success, reflecting shrewd top management. Hewden-Stuart had 180 tower cranes on rental at the peak of the boom and a casual observer might be surprised it is still in business. In fact, it was recently able to buy BET's plant hire business for pounds 11m in cash and still show no borrowings on its balance sheet. It did this by disposing of equipment (the tower crane fleet has plummeted to 60), by moving into new rental areas, by shifting its customer base away from construction companies and towards councils and utilities, and by operating highly conservative depreciation policies so that cash flow stayed strong while profits fell heavily.

Now it is poised to reap the rewards. Even a reasonable economic recovery could take profits back towards the pounds 35m plus achieved in the boom, against last year's pounds 12m and the pounds 14-15m expected for the current year.

Ashtead, with its uniquely devolved structure giving branch managers local autonomy and all staff a share in monthly profits, has arguably weathered recession with even greater style. It is actually a bigger company than it was at the peak of the boom, with greater turnover, more branches and 10 per cent more employees. Inevitably, margins are only a fraction of the levels seen in the 1988-90 period, but the group is already on a recovery path. Profits are up by 50 per cent in the second half of the year and, for the first time in years, the value of turnover has increased by more than the volume - indicating that rates are improving. Forecasters are looking for profits to reach pounds 4m this year and pounds 5.5m next. Those may be conservative but still leave the shares looking good value, with the notional full-taxed p/e falling to the mid teens on the 1994 forecast.

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