Cube Midcap Report (Tue 18 June 2019) – AHT, SAFE

Cube Midcap Report (Tue 18 June 2019) – AHT, SAFE

Good morning!

Today we have:

Ashtead Group

  • Share price: £20.245 (+3%)
  • Market cap: £9,440 million

Final Results

Ashtead, the equipment rental company, is a long-term winner in the stock market. Anyone who has held it for two years or longer has been richly rewarded.

While a reducing share count is no guarantee of strong returns, I note that Ashtead’s share count is lower now than it was ten years ago. It spent £675 million on buybacks in its most recent programme, and expects to spend at least another £500 million in the year ahead.

Its key subsidiary is Sunbelt Rentals (you may have difficulty accessing this website from Europe).


A booming economy for Ashtead’s end-markets in North America have spurred strong growth, including an 18% improvement in rental revenue and a 17% increase in underlying PBT.

At the primary business unit, Sunbelt USA, most rental revenue growth (20%) was organic (15%), with only 5% driven by acquisitions over the past two years. Organic growth includes the contributions from existing stores and the opening of completely new stores.

Optimism for the future also saw the company investing a combined £2.2 billion in capex and bolt-on acquisition during the latest financial year.

Returns and margins

In the small-cap world, I have seen some pretty poor results within the equipment hire sector.

Ashtead, on the other hand, demonstrates excellent returns and a clear focus on margins and “drop-through” (the portion of revenue growth which flows through to operating profit).

For example, revenue has grown by almost £800 million in FY April 2019. This has converted to an increase in underlying PBT of £183 million – i.e. there was an underlying pre-tax profit margin of 23% on additional revenue. Not bad!

(On a statutory basis, PBT increased by an even larger amount, almost £200 million.)

Ashtead reports a return on investment – which I think is roughly equivalent to return on capital employed – of 24% in its US business. The UK and Canadian businesses haven’t performed quite so well, but the overall result is decent at 18%. I think that businesses which use a KPI equivalent to return on capital tend to do very well.

Net debt excluding leases, has increased to £3.7 billion, with net debt to EBITDA at 1.8x at constant FX. This is within the target range of 1.5x to 2x. (This ratio and its target range are being updated to reflect the new accounting standard for leases.)

Outlook – confident in the medium term.

My view

This is highly investable and something I might like to add to my portfolio.

The main factor holding me back has nothing to do with the company itself, and is more to do with timing my entry point. At the moment, with the US economy booming and the industrial sector very healthy, I wonder if investors might be lulled into a false sense of security? The end-markets are cyclical, after all.

On the other hand, looking at its current valuation, I note that Ashtead is on a historically modest P/E multiple of just 10x (using FY 2020 net income forecasts). With so much investment taking place, including significant expansion taking place in Canada, the prospects for continued growth in the medium-term appear very strong.

This is a great candidate for further research and is worth putting on watchlists for a buy around current levels, in my view.


Safestore (SAFE)

  • Share price: 651p (-0.4%)
  • Market cap: £1,370 million

Interim Results

This is a REIT (real estate investment trust) which is also the UK’s largest self-storage company.

I like this theme and if I was going to invest in property, I would probably buy this or another self-storage play. It seems likely to me that things are only going to get more crowded (without or without Brexit) and with space at a premium, the demand for storage could outpace the economy and the property market as a whole.

We can get a sense for this in Safestore’s like-for-like metrics: occupancy as a % of lettable area and average rates charged for storage are both up year-on-year.

The market seems to share my optimism as EPRA NAV per share (measuring assets at fair value) was only 406p at April 2019. So you have to pay a massive 60% premium to buy into this investment trust.

PBT has halved for the period to £38 million, as the gain on property revaluations reduced to £8 million (H1 2018: £52 million).

Outlook – more like-for-like growth is expected against what the company describes as “a strong quarter last year”. This reference to a tough comparative might be interpreted as a sign of caution.

Recently opened stores are “in line with or ahead of their business plans”. The company is on track to meet full year expectations.

My view – REITs don’t fit into my strategy, so I won’t study this in further detail. For those who do invest in REITs, I think this is worth considering as the premium to NAV could be justified. There is a clear advantage in being the market leader and sometimes it’s worth paying up for that!



A slightly shorter report today as I have a few other things to take care of. Please note that we are back again with a Midcap report this Thursday, 20th June.






Wordpress (7)
  • comment-avatar

    Thanks Graham, a good read as always.

    I appreciate that they are not directly comparable but they are supposedly both exposed to very similar sectors (US construction) so why has Ashtead been able to do so well whereas Somero has disappointed and warned going forward?

    • comment-avatar

      Hi Laughton, this is going to sound silly but perhaps most of AHT’s equipment can be used indoors/in the rain?

      Thanks for the comment. G

  • comment-avatar

    I like to have your portfolio .like Mr Roland Head .There i can see what percentage of your portfolio you have invested and when you have sold.I am looking forward to see your portfolio.

    • comment-avatar

      Hi Romman, I’m going to publish the next edition of my investing diary soon, which will include my portfolio.

      Thanks for your interest. Graham

  • comment-avatar

    Hi Graham, Well, not silly and yes a lot of AHT’s equipment probably can be used indoors but (a) a lot of the heavy stuff can’t and (b) there has to be an indoors and in many cases that means a flat floor or floors.

    Or maybe AHT just has a much broader range of customers/applications so possibly less of a hostage to the weather and therefore the better investment?

    • comment-avatar

      Laughton, I agree with the second sentence — it’s the broadness of AHT’s offering that is likely to be the main factor. See Justme’s comment below. Sunbelt Rentals is top or #2 in the category in US equipment rental.


  • comment-avatar

    Hi Laughton/Graham,

    Re Ashstead Vs Somero I believe the main difference you will find is that Ashstead can also capitalise on a much wider market incl the residential, office/retail and infrastructure markets whereas Somero are constrained (broadly speaking) to warehousing (where their products are specialised). Although this is a growing area if you look at where most of the construction growth has been coming from in the UK stats recently it has been residential construction while other sub sectors stall.

    Anecdotally, I work in the UK construction (resi) industry and we use Ashstead a lot, where as we would never consider using Somero for residential builds.

    But that’s Just Me

    Hope that’s helpful

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