The latest Investing Matters Podcast episode featuring Jeremy Skillington, CEO of Poolbeg Pharma has just been released. Listen here.
On one of the investor presentations on the AHT website an American analyst asks if the company is being too CONSERVATIVE with its leverage!
For AHT to suspend or reduce shareholder returns in order to pay down debt might not be a popular move.
I'm no fan of the buybacks either, but seems we're stuck with them. If you want the cash you'll just have to sell some of your shares. When I last bought AHT there were 500m shares in issue and now there are 470m, so in theory if I sell off 6% of my holding I've got the equivalent to a dividend (I think). Not that I'm going to sell, AHT still seems to have very bright prospects, ups and downs of the US economy allowed for.
OK, for "yield" substitute Free Cash Flow Yield:
Free Cash Flow yield (FCF yield) is a measure of the amount of cash left over at a company after it has paid its operating expenses and capital expenditures. FCF yield tries to capture how much cash is left over for investors. For the middle of the road company in the S&P 500, the FCF yield is about 4%. Google has a FCF yield of 2.53%. Facebook is 3.59%. Amazon is 0.95%. Apple is 5.21%. When you look at tobacco, Altria is 5.70%, British American Tobacco is 6.59% and Phillip Morris is 6.65%.
https://www.forbes.com/sites/jordanwaldrep/2018/09/28/why-you-should-not-ignore-tobacco-stocks-anymore/
At 7% AHT is still out ahead even while posting double-digit growth. And I still think the interesting times start in 2021 when AHT should emerge from its current empire-building phase with a spare £2 per share of growth capex in its pocket.
Of course, as we all know AHT is a highly-leveraged house of cards that is built on debt and an obliging North American economy and could collapse at any time! That's why I happened on the above article while researching non-cyclical stocks that are not particularly exposed to the USA.
AHT yield is over 7%
The dividend is about 40p per share
The buyback commitment is £500m per year. With about 480m shares in circulation that's £1 per share or so.
Total £1.40, yield is therefore a little over 7%
Personally I'd rather have the full £1.40 paid out as dividends. Three possible reasons why buybacks are getting most of the money:
1. US shareholders prefer buybacks
2. AHT say the current dividend is intended to sustainable through the cycle, ie it's being kept low in the hope it won't need cutting in the downturn.
3. On current numbers, £500m spent on buybacks saves £10m from the cost of the following year's dividend.
Note that AHT is combining a 7% yield with annual growth of 15-20% under the 2021 plan.
It's interesting to think ahead to where AHT will be when the 2021 plan completes. Growth capex is about £2 per share (new stores + acquisitions) so assuming that they don't immediately launch another five-year plan to double in size again by 2026 (fingers crossed they don't do that!) there could easily be scope to add another £1 to the current payout of £1.40 per share.
"Vertikal Comment
Another quarter of exceptional growth, achieving such substantial growth quarter after quarter is incredible. Clearly the company is on a roll and has kept it going by fuelling/funding the strong momentum that has built up. It is showing no signs of abating and looks well placed to maintain the growth into the new financial year.
The same cannot be said of A-Plant in the UK, although its quarterly numbers are encouraging, but whether this is something that it can sustain in the fourth quarter remains to be seen. The company is well placed in the UK market but could do some much better, if only it could gather some of the Sunbelt spirit and open mindedness.
Overall though another first class performance."
https://www.vertikal.net/en/news/story/32458/
Vertikal appears to be a German equipment site. I agree with what they say about A Plant, either AHT needs to appoint a new manager to shake it up or else they should just get shot of it and transfer their primary listing to NYSE.
Ashtead explained the buybacks some time ago. They said that ownership of the equity is split equally between US and UK investors. In the US they hate dividends and love buybacks, in the UK they hate buybacks and love dividends. Hence shareholder returns are made using both methods.
AHT's special charm is that it's a strong growth company operating under cyclicals rules. One day no doubt we'll see Deutsche Bank's £7.70, maybe even much less, because the current cycle has to end some time and when it does the p/e could drop into low single figures. (The p/e is not exactly high at the moment!) However, provided Ashtead's growth opportunities continue to look reasonable (target is 20% North American market share up from current 7%) the low price will just be another good buying opportunity.
Item from rermag.com. The equipment rental industry will reach $57.3 billion in the United States in 2020, according to the latest five-year forecast released by the American Rental Association, which projects a compound annual growth rate of 4.9 percent. The numbers in the forecast, updated at the end of July, are slightly modified compared to ARA’s quarterly forecast in late April, reflecting changes in the marketplace. ARA now projects industry revenue to increase by 4.9 percent in 2016 to a record $47.6 billion and to grow another 4.6 percent in 2017 to reach $49.8 billion. The new forecast extends the projections to 2020 for the first time, showing steady revenue growth from 2016 through 2020 of between 4.6 percent and 5 percent each year. “While the forecast has been adjusted to reflect changing market conditions, equipment rental is growing at more than double the rate of GDP growth and that is a good sign for the industry,” said John McClelland, ARA’s vice president for government affairs and chief economist. However, Scott Hazelton, managing director of IHS Economics, the economic forecasting firm that compiles data and analysis for ARA’s Rental Market Monitor, says economic growth in the first half of the year in the U.S. has not been as strong as previously expected because of uncertain growth overseas and the increasing value of the dollar. “This also has been acerbated by uncertainty surround future policy direction from a muddled presidential campaign season,” said Hazelton. “However, construction remains strong, particularly in the residential sector, both new and home improvements. While nonresidential growth is slowing, we remain on track for another year of solid gains and consumer spending also remains strong. The slight adjustment in the forecast growth reflects the fact that the economic and construction fundamentals remain positive.” The biggest change to the new forecast concerns Canada. Instead of projecting a decrease in total revenues in 2016 as it did in April, the ARA Rental Market Monitor now forecasts a 0.8-percent increase to $4.976 billion and total rental revenue in Canada is expected to grow at a compound annual growth rate of 4.2 percent between 2016 and 2020. IHS expects real residential and nonresidential construction to rebound in 2017 and beyond, reaching $5.859 billion by 2020.
Unfortunately it's all too easy to see how Deutsche's target could be reached. Although AHT and URI are on about the same p/ ratio, Ashtead's price sales ratio is double United's. Ashtead is no doubt the luckier company (they've said as much -- no Canada, no oil), hence the reason for its superior profitability, however there's no reason to suppose their advantage will last forever and presumably over time the price sales ratios of the two companies will converge. Up, down, somewhere in the middle, whichever way it goes you'd have to say that URI looks the safer long term bet (if you like highly geared market-dominating plant hire companies that is). My own target of £20 is a multi-year one and is based on (a) stated target of 20% US market share, up from 7% currently, and (b) share buybacks during slack periods. Re Hertz, I do recall Ashtead predicting a future in which the current three market leaders become two or three leaders. Note that one of the leaders, presumably Hertz, has potentially dropped out of the picture.
http://rermag.com/rer-100/rer-100-top-rental-equipment-companies-2015 Positive about the next couple of years and about the prospects of the big companies in particular.
I would love to see AHT properly downgraded -- if they are about to enter a phase of the cycle where capex is low and earnings are strong then the weaker the SP the better, it means they can buy back more shares. And I can buy some more as well. Cycles aside, the only real threat I see to this company and its peers is that the equipment manufacturers, Caterpillar, Volvo etc, effectively turn themselves into rental operations and, so to speak, try to cut out the middleman. They already offer hire as an alternative to sale, I guess the total effect depends on their willingness to set up against powerful competitors who also happen to be their biggest customers. Ashtead's target is 20% of the US market. Icing on the cake is if they spin off A-Plant or sell it to Speedy or someone.
£20 my personal target, although probably not on the same sort of time scales that Deutsche Bank analysts work to! When it gets there I want to be holding 50,000 shares, 0.1% of the company. The webcast on the Ashtead site is instructive. The CEO admits his limited exposure to oil, gas, and Canada is down to "dumb luck", but looks ahead to a future when Ashtead and its large, well-financed, and well-managed peers carve up the large and growing North American rental market between them.
SP can drift as low as it likes, Ashtead say the predicted outlook, ie reduced capex, turns them into CASHTEAD with lots of spare pennies to buy back shares. The lower the SP the better! Longer term we have AHT's prediction that they can more than triple EPS thanks to increases in all three of north American construction activity, rental penetration, and market share. Three times EPS plus shares bought back at low low prices -- I can't see any problem there!
Not great, and if it were United Rentals reporting these you might be worried (although good to see that their rates are up). However, Hertz's plant rental operation appears to be somewhat troubled and therefore might not indicative of general market forces. Also interesting that at page 36 of the January investor presentation (http://www.ashtead-group.com/lib/docs/042404-analystandinvestormeetingjanuary2015.pdf) Ashtead see themselves progressing from "Top 3" to "Top 2 or 3", meaning they see the possibility of Hertz dropping out of contention leaving domination of the market to themselves and URI. Here's hoping.
The equipment rental industry will set an industry record for revenues in 2015 according to the latest industry forecast from the American Rental Association, despite reduced demand for equipment in oil patch drilling sites. Rental companies historically are able to adapt to changing market conditions, shifting inventory and moving equipment to where demand is greater. Increased activity in construction as well as party and event market segments are offsetting the decline in opening new sites for drilling. The new quarterly ARA forecast from its ARA Rental Market Monitor subscription service has been modified slightly from February with total revenue growth of 7.9 percent expected in 2015 to reach a record $38.5 billion in the United States, including construction/industrial; general tool, and party and event. ARA’s current five-year forecast calls for steady growth of 7.2 percent in 2016, 8 percent in 2017, 7.9 percent in 2018 and 6.8 percent in 2019 to reach $51.3 million. “Even as several forces, including harsh weather, held back U.S. economic growth in gross domestic product to 0.2 percent in the first quarter, total rental revenue was up 4.9 percent in the same time period and is expected to exceed 9 percent in the second half of the year,” said Christine Wehrman, ARA’s executive vice president and CEO. Global forecasting firm IHS Economics and Country Risk, which compiles data for ARA, is now forecasting construction/industrial rental revenue to increase 8.2 percent in 2015 to $25.9 billion, with general tool projected to grow 7.9 percent to $9.8 billion this year and party event to show a 4.7 percent increase to $2.7 billion. “The equipment rental industry will achieve its new peak level as the result of a prolonged gradual improvement in the economy as a whole, and construction, industrial and consumer markets in particular,” said Scott Hazleton, managing director of IHS. “There was also some lift from energy markets, which are slowing, but the majority of the growth has come from solid fundamentals. Given a current level of activity based on solid ground, an economy that continues to improve will lead to rental revenues that are achievable and lasting.”
If Buffett was such a smart cookie he'd have chosen Ashtead not Tesco when looking around for a UK stock to buy! This incredible share is up 1000% in five years, and I've been lucky enough to have most of my portfolio in it. I'm now getting slightly conflicted about continuing to hold. The company says it can grow the Sunbelt operation another 3.6 times (http://www.ashtead-group.com/lib/docs/042404-analystandinvestormeetingjanuary2015.pdf, final slide), however this will mean the fleet also growing by 3.6 times, higher borrowings also, all of which leaves the share price more exposed as the cycle advances. Top of cycle P/E ratios can go very low, and Ashtead's dropped to single figures in 2009! The company is promising to return to cash to shareholders as capex eases, however I can't see this compensating for the drop in the SP.
http://www.ashtead-group.com/lib/docs/042404-analystandinvestormeetingjanuary2015.pdf The last slide shows "Key growth drivers over the longer term", these are given as cyclical recovery +50%, market share gains +100%, shift to rental +20%, giving Sunbelt a cumulative 360% increase in market size over an unspecified number of years. Negative factors: Sunbelt is not the whole of Ashtead (unfortunately), pressure on rates as cycle develops, higher borrowing costs to finance capex, shrinking p/e as cycle develops. Still, could be scope for the sp to double again within a reasonable timescale.
Positive piece here from rermag.com/ Slumping oil prices will not have a dramatic effect on United Rentals, CEO Michael Kneeland told a conference call of investors this week, saying that upstream oil and gas accounts for only about 6 percent of the company’s business. And at the same time, Kneeland noted, lower fuel prices will have other positive effects to mitigate the effects of an oil slowdown. Nonetheless, Kneeland acknowledged there will be concerns. “We’ve dug deep into this issue and while we haven’t seen any significant attrition to date, we do expect some impact as rig counts come down,” Kneeland said. “But we disagree strongly with the idea that our growth is at risk and I’ll give you five good reasons why we feel this way.” First, Kneeland said, upstream oil and gas accounts for only 6 percent of United Rentals’ business companywide. “That’s a very modest exposure, given our fleet can be utilized for other types of customers,” he said. “Even in the battlefield states or a state like Texas, we’ve got deep customer relationships outside of oil. Currently more than 80 percent of our rental revenue in Texas comes from infrastructure, manufacturing, transportation, commercial building and a host of other industries.” Second, the company has strong systems in place for fleet management, including the relocation and repurposing of CapEx through used sales. “Third, we believe that any drag on demand for upstream oil will be mitigated by the positive effect on other industries,” Kneeland said. “Take chemical manufacturing, one of our key sectors. When oil prices decline, manufacturing costs drop, production is stimulated and consumer purchasing power increases.” Kneeland added that United’s widespread geography footprint was a factor in its favor as well, giving it a lot of room to deploy assets, with many in the field asking for more assets, giving the company many opportunities to re-deploy fleet. And lastly, the current growth cycle, with “a lot of runway ahead in the industry upcycle, the macro economy is also trending in our favor,” he said. Kneeland was also bullish on the performance of United Rentals’ specialty rentals sector. “Our full year revenue gain in specialty, which includes the acquisition of National Pump in April, was approximately 83 percent and a gross margin of almost 51 percent,” Kneeland said. “That’s nearly 400 basis points higher than the previous year and our fourth quarter margin for specialty was up nearly 500 basis points.” Kneeland said “key account revenue” increased 16 percent year over year, with national accounts jumping more than 18 percent. “For 2015, we’ve earmarked a $170 million or about 30 percent of our [gross] rental capex to meet the increasing demand of our specialty fleet,” he
IHS Revises Downward Expectations for Rental Industry Growth in 2014 Nov 3, 2014 EMAIL INSHARE COMMENTS 0 IHS has revised downward its estimate of growth in the equipment rental industry in the United States to 7.3 percent to $35.7, replacing its previous estimate of 7.6 percent growth to $35.8 billion, the American Rental Association reports. Still, the industry’s growth rate will more than triple the expected growth in gross domestic product in the U.S. in 2014 and exceed the growth of the industries it serves. “The revision in our expectations has to do with the general economy and with the construction industry, where growth this year has not met expectations,” said Scott Hazelton, director of industry consulting at IHS. “Construction will continue to improve in the fourth quarter, but it is not likely to accelerate enough to reach our earlier projections.” In 2015, equipment rental revenue is expected to grow another 9.2 percent to reach $39 billion, followed by growth of 7.7 percent in 2016, 8.5 percent in 2017 and 9.3 percent in 2018, reaching $49.8 billion. During the next four years, the construction and industrial segment and the general tool segment will experience near double-digit growth in U.S. rental revenue. In 2015, construction and industrial rental revenue is projected to increase 9.8 percent and general tool 9.0 percent, followed by 7.9 percent and 8.1 percent in 2016, 8.6 percent and 9.8 percent in 2017 and 9.0 percent and 11.8 percent in 2018, respectively. The party and event segment is expected to continue its same steady growth, with revenue increasing 4.2 percent in the U.S. in 2014 to reach $2.6 billion, followed by growth rates of 3.9 percent, 3.5 percent, 2.5 percent and 2.7 percent for 2015 through 2018. The forecast for Canada calls for 5.4 percent growth in 2014 to $4.9 billion, with growth of 5.2 percent in 2015, 6.8 percent in 2016, 3.5 percent in 2017 and 3.6 percent in 2018 to total $5.9 billion at the end of the latest five-year forecast. IHS also expects rental companies in the U.S. to continue to invest more than 30 percent of their revenue in new equipment during the next five years. Total investment, the ARA Rental Market Monitor predicts, will reach $11.9 billion in 2014 and grow to nearly $15.5 billion in 2018.
A couple of upbeat items for your Thursday evening: First the CEO of United Rentals on his company's results (I happen to think that while there's enough work around about to stop them fighting each other, what's good for URI is also good for Ashtead) “Our strong performance in the quarter reflects significantly more equipment on rent at better margins than a year ago, resulting in a new high-water mark for second quarter EBITDA margin,” said United Rentals CEO Michael Kneeland. “The rebound in non-residential construction is continuing to drive up demand, particularly in the energy and commercial sectors. Given the vigorous activity we’re seeing and the benefit of secular penetration, we’ve raised our full-year outlook – and we concur with the forecasts that show multiple years of healthy industry growth beyond 2014.” And then this on shale: The value of nonresidential construction starts in June jumped 14 percent compared with June 2013, Reed Construction Data reported this week, based on data it collected. Cumulative starts for the first half of 2014 exceeded January to June 2013 starts by 2.4 percent. Nonresidential building starts slipped 3.1 percent year-to-date, with a 14.5 percent drop in commercial starts offsetting gains of 5.9 percent for institutional buildings and 13.5 percent for industrial (manufacturing). Heavy engineering starts rose 13 percent year-to-date. “Due to growth in shale gas production, there has been—and continues to be—a significant increase in capital investment, by chemical and other manufacturing industries, with the possibility of hundreds of billions in new domestic investments, which will drive new business and job growth,” the American Chemistry Council Economics Department wrote in its Weekly Economic Report. “ACC maintains a list of shale-related chemical projects announcements and updates it weekly. Our current list of chemical industry projects totals 188 projects, representing cumulative capital investments totaling $116.9 billion in the U.S.”
http://www.ashtead-group.com/investorcentre/webcasts.aspx Usual confident presentation from Mr Drabble and all the analysts forget to ask him about global war!