Cube Midcap Report (Tue 18 June 2019) – AHT, SAFE
Today we have:
- Share price: £20.245 (+3%)
- Market cap: £9,440 million
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.
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.
- Share price: 651p (-0.4%)
- Market cap: £1,370 million
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.