Investment View: Ashtead might lack glamour but it's still thriving

ASHTEAD: Our view: Buy. Share price: 250p
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The Independent Online

Ashtead is living proof that you don't need to be in a glamorous industry to be successful.

The company won't be doing any whizzy product launches. It won't be showcasing any ground-breaking innovations with glossy presentations either. And it isn't even in particularly hot markets with the US providing the bulk (80 per cent) of its profits and most of the rest coming from these shores. So no slides about how marvellous the Chinese opportunity is at its results presentations.

All Ashtead does is rent equipment – tools and the like – to people like builders. However, it must be doing something right because the company managed to smash analysts' forecasts for its full-year profits (for the year ended April 30) which came in at £131m, compared with just £31m last year. The City scribblers had predicted a shade above £120m.

So what's going on? The company is benefitting from two things: the uncertainty of the economic climate and the inability of companies to raise much in the way of capital.

The US construction industry has never been at a lower ebb but Ashtead is booming because it is far better for companies to rent equipment when they have got work than buy it and see it sitting idle when they haven't. What's more, with capital so difficult to obtain, it makes more sense to deploy what you do have on, for example, buying land than it does buying equipment.

That difficulty getting hold of finance also makes it tough for Ashtead's smaller rivals, whose kit is getting old and rusty. Ashtead, by contrast, has been busily upgrading its fleet of equipment (it has brought forward a good chunk of capital expenditure for that purpose).

What if the economy grows? Doesn't that mean clients will buy their own gear again? Maybe, but if activity increases then, theoretically, the overall rental market might also grow. Perhaps the only real killer for Ashtead would be a really desperate downturn. Otherwise the company would appear to be in something of a sweet spot.

The trouble is that while Ashtead might not be a particularly glamourous business it does sit on a (fairly) glamourous rating, at about 14 times the current year's earnings, with a yield of just 1.6 per cent. The dividend policy is progressive, but don't expect a radical increase in the yield any time soon.

This is not a stock for income. But it does offer good growth potential and so it could be argued that the rating doesn't totally reflect its potential.

This column has been a buyer of Ashtead for some time now, taking the plunge at 150p two years ago and then at just over 170p last year. The shares have more than justified that faith up to this point.

With the uncertainty that has driven clients to rent rather than buy apparently here to stay, there ought to be more to come. Not least because Ashtead is a big gun in a fractured industry.

If things do get really nasty, it should be able to muddle through better than most, while also picking off distressed rivals (if they don't call in the receivers, that is). Debt has been falling compared with earnings, so the company has the ability to make useful acquisitions, and it recently increased its borrowing capacity.

The deals it has been doing have been small, gradually easing the company into markets outside construction that are less cyclical. Such as, for example, the recent acquisition of a regional firm specialising in the hire of climate control equipment that it believes it can expand nationally.

I'm also reassured by the operation's history of proving willing to walk away from bigger deals if they don't make sense from a financial standpoint.

Ashtead is no longer a bargain buy and I wouldn't blame anyone for taking some profits, particularly if they bought down at the 150p level. However, there is a strong argument for hanging on in there right now.

Because of its favourable position in the market in which it operates Ashtead should be a core holding and the shares still have potential to kick on from their current level. So rent some space and keep buying.