The downturn in the US housing market has hit many UK firms exposed to North America. House builders have suffered, and billions of dollars have been wiped off HSBC’s valuation because of its exposure to US subprime mortgages. But there’s been one notable exception – firms operating in the US non-residential construction sector. Take this week’s pick
Ashtead (AHT), tipped as a BUY by The Independent
Ashtead rents out construction equipment and tools, such as diggers, scaffolding, and traffic management equipment. It also plays a vital role in clearance and reconstruction operations following natural disasters.
Ashtead enjoys strong positions in its US and UK markets. It makes 79% of sales in the former and in the latter owns the number two and three players, Sunbelt Rentals and A-Plants. Last week, the board reported solid results and reiterated its confidence in meeting this year’s targets. There was growth across all units, with underlying operating profit of £150.5m, up 45% at constant exchange rates. Although adjusted earnings per share fell 3% to 10.3p, this was due to an expected earnings dilution from the $1bn acquisition of NationsRent last August. The City expects current year sales and earnings per share of £1,051m and 14.7p respectively, rising to £1,085m and 15.6p a year later. Net debt on 30 April 2007 was £916m – a ratio of debt to earnings before interest, taxes, depreciation and amortisation of 2.7.
The board said “the new financial year has started in line with expectations” and “the markets in which we operate remain strong”. Ashtead’s prime focus is commercial construction, which is still being driven by robust corporate and government expenditure. Moreover, the long-term trend in the US to rent rather than own construction equipment is continuing. In the mid-1990s only 5% of such equipment was rented, but this had risen to 38% by 2006, and is set to reach 50% by 2010. By contrast, UK rental penetration is in the 70%-80% range.
But what are the dangers? If a steep and protracted economic downturn hits the US or UK, Ashtead’s profits would suffer. There has also been some concern over the NationsRent acquisition. But the deal has now largely been integrated, delivering annual cost savings of $48m, ahead of its $37m target. Combined dollar utilisation rates (rental revenues divided by the original cost of the equipment) have already improved from 59% to 62%; the aim is to lift these to 65% by the year end. On a forward p/e ratio of 10.3, the shares rate as good value.
Recommendation: BUY at 153.25p
• Paul Hill also writes a weekly share-tipping newsletter, Precision Guided Investments