Ashtead: Building Success Brick by Brick
Ashtead: Building Success Brick by Brick
In January, we covered Booking Holdings and Paychex Inc. If you missed these articles, here are the links:
This month, we are revisiting Ashtead Group (“Ashtead”, “AHT”, and “Company”), a company we previously covered in November 2022 (Ashtead Group – Renting is Flexible and Affordable), but we didn’t pull the trigger at that time, due to valuation concerns and fears of recession linked to its high debt balance. However, since then, the concerns regarding global recession have diminished, with the inflation rate falling to 3.1% (in January 2024) and US GDP growth recording 3.1% YoY for December 2023 and 3.3% growth from the preceding quarter.
Considering these factors and the divergence in performance compared to its key competitor (United Rentals – see our December 2022 article here: United Rentals Inc: A Leader in the Equipment Rental Space),we have opted to analyze Ashtead instead of discussing an existing portfolio company.
Contents:
Short Intro & Performance Update
Peer Comparison
Market size & Forecasts
Valuation
Conclusion
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1. Short Intro & Performance Update
Ashtead remains the second-largest equipment rental company in North America, trailing United Rentals (“URI”), and operates under the brand name Sunbelt Rentals in the US, Canada, and the UK. With years of experience, Ashtead has pursued a strategy of consolidating smaller competitors, acquiring 138 companies over the past 5.5 years, and establishing new greenfield locations to expand its geographical footprint.
Its primary segment is construction, which accounts for approximately 40% of sales, leading to cyclicality and exposure to macroeconomic conditions. However, the Company's expansion into specialty markets such as theme parks, live events, and TV production among others, allows for rapid growth while providing insulation from economic shocks. Furthermore, Ashtead's clustered approach to enhance rental penetration and the increasing emphasis on Specialty rentals (such as power and HVAC, scaffolding, and ground protection) compared to General Tool equipment (like earthmoving and forklifts) are expected to enhance margins over time.
If you're new to Ashtead, keep in mind that in FY23 (the latest fiscal year ending on April 30, 2023), 85.1% of revenue was generated in the US, 8.5% in the UK, and 6.4% in Canada. Looking ahead, we anticipate the weight to shift further towards the North American region. Therefore, in this article, you may notice more discussion focused on this region.
a. Clustering & Specialty
Clustering
Under the Sunbelt 3.0 plan (April 2021 to April 2024), the Company aimed to cluster 49 of the top 100 US markets and 4 out of the top 10 Canadian markets. As of October 31, 2023, it had already achieved clustering in 54 US markets and 5 in Canada.
Clustering involves grouping both large and small General Tool and Specialty rental locations, allowing Ashtead to offer a comprehensive and differentiated product lineup, convenient service, and benefit from increased purchasing power. This strategy enhances its competitive position, improves margins, and boosts returns on investment through synergies among the grouped locations. The successful execution, is evidenced by the number of clustered markets and the improved Return on Investment (see chart below) since the plan's implementation.
Source: Ashtead Investor’s Presentation Half year results, 31 October 2023
Specialty
As previously discussed, the Specialty offering plays a crucial role in improving margins. Although Ashtead doesn't explicitly state the profitability of each segment, an analysis of URI's results shows an average 5-year difference of 1,140 basis points in gross margin between specialty and general rentals. In FY23, Specialty rentals revenue accounted for 30% of Ashtead's business and grew at a faster rate than General Tool rentals, as shown by the chart below. This trend contributed to achieving the targeted $2.4 billion a year earlier than planned under Sunbelt 3.0, with revenues reaching $2.5 billion in FY23.
Source: Ashtead Investor’s Presentations, StockOpine analysis | Note: In Q2’’24, specialty growth changes to 16% when adjusted for the low storm revenues in October.
Specialty rentals offer considerable room for growth due to the low penetration of rental equipment across various business sectors, despite the benefits they provide, including freeing up capital, flexibility, access to the right equipment for any job, reduced downtime, and savings on storage costs. This potential is further underscored by the low penetration in the facility management rental sector. According to the Annual Report FY23, the US alone presents a potential rental market valued at $7 billion to $10 billion. Management is actively dedicated to expanding adoption on this front.
“When you do see an air conditioner or a heater in the corner of a room, it's most usually owned. When you see a sweeper or scrubber in the lobby or in the square, it's most usually owned.
When you see a power generator, a standby generator bolted to a piece of concrete outside of a building, that is putting out emissions every single week just exercising itself, it's always owned. So the opportunity there is massive. It's super low rental penetration. It just takes time to move that curve. And with these Specialty businesses and the cross-selling and collaboration that we have with General Tool, we'll move it.
We'll move it over time. We're in no rush, frankly. We'll do that, and that just speaks to the longevity of the growth prospects for this business.” Brendan Horgan, CEO
b. Financials
Since FY12 until Q2’24, the Company has achieved a revenue Compound Annual Growth Rate (“CAGR”) of 16.3%, reaching $10.4 billion, while EBITDA (TTM margin of 45.5%) and Operating profit (TTM margin of 25.7%) grew by a CAGR of 19.4% and 21.4%, respectively. These figures demonstrate the leverage benefits that scaling and clustering the business have to offer.
Source: Ashtead Annual Reports, StockOpine analysis
However, over the past year, the price of Ashtead has remained stagnant, recording a loss of 8.0%, when URI’s stock price, its competitor, increased by 38.6% over the same period. Before delving into the peer-to-peer comparison, we will focus on the internal factors justifying the drop.