Following a successful third quarter of 2023, Ashtead Group plc (OTCPK:ASHTY) has raised its guidance for FY23 capex and earnings growth. Both revenue and profit growth were widely expected, but the 2024 capex guide was quite a surprise. A rate of return that exceeds the standing consensus. This will likely result in an upward revision to consensus earnings forecasts for FY2024. What I find most interesting and encouraging is management’s reaffirmation of its optimism regarding future quarterly results. In previous quarters, despite strong growth, we had doubts about the sustainability of growth, so this gives us hope. For 2024, it is encouraging to hear that contributions from fleet growth, favorable interest rates and M&A will all contribute to meeting or exceeding the targets set for the year.
After reviewing the results of 3Q23, I I am more convinced than ever that ASHTY is a great business. I think ASHTY is now less cyclical, has higher margins than before, and an improved cash flow profile. Essentially, his investment in ASHTY stock today is easier to underwrite than it used to be. In particular, I think that the rapid growth period of ASHTY is probably over.
But more importantly, the business is less dependent on market cycles. We believe ASHTY can sustain growth in the current market while maintaining healthy margins and returns and increasing free cash flow. Most importantly, I believe that with today’s improved business model, ASHTY has shown much greater resilience than previous downcycles. From a valuation perspective, the multiple increase is justified by the fact that ASHTY’s growth is more predictable, earnings-enhanced and less cyclical. That said, ASHTY should continue to perform well in his 2024, and the market should revise the stock upwards as a result.
Strong US market
It’s great to hear that the strong performance of the 3Q call is consistent across all regions and service offerings. However, despite the favorable supply/demand ratio, supply constraints, inflation and a shortage of skilled labor remain problems. Perhaps most importantly, this relates to what we said earlier about a more effective business model in this market: ASHTY is still gaining market share.
Most importantly in this context, the market is undergoing a fundamental shift, increasing rental penetration and benefiting a handful of dominant players like ASHTY. That’s it. In my opinion, ASHTY should make good use of this time by streamlining its operations, consolidating as much market share as possible, and being ready to compete for market share when the economy improves. In terms of pricing, management expects tariff increases across the industry to continue in FY2024.
For US construction, both the Dodge Momentum Index and the number of new construction projects remain at solid levels. Investors should be aware that factors such as reshoring and federal spending laws have significantly decoupled the non-residential cycle from the residential cycle. Management also said future market demand will be strong as construction volumes are already known and projected.
New EQ lead time
The bad news is that CAPEX guidance does not suggest increased equipment availability. Lead times are still very long and constraints have not been eased. However, management noted that a larger and more agile player has secured a larger share of the equipment by aligning with his OEM early on.
FY23 & ’24 Guide
US rental revenues increased 27% in the third quarter on the back of high occupancy rates and higher rental vehicle rates. For this reason, management has raised his rental income growth forecast for 2023 to 23-25% from his 20-23% and believes this positive trend will continue in the near future. It is also encouraging that his EBITDA improved strongly in the third quarter despite the dilutive effect of the addition of Greenfield and his ongoing M&A. Management said they are confident of continued growth through FY24.
New guidance for FY24 of $4.0 billion to $4.4 billion in gross capex and guided rental income growth is significantly higher than previously expected by the market. Strong rental growth and high incremental profit margins are expected to continue to drive ASHTY’s earnings upward trend. Supply constraints, inflation and a shortage of skilled labor will also push out smaller players and benefit large service providers like ASHTY.
Ashtead Group plc’s Q3 2023 results are impressive, with increased FY23 earnings growth guidance and surprising FY24 capex guidance, pointing to higher returns than consensus suggesting. Management’s optimism regarding future quarterly results is also encouraging. Importantly, ASHTY’s less cyclical nature, higher margins, and better cash flow profile make it a better business today than it was in the past.
Ashtead Group plc’s period of rapid growth may be over, but the company’s increased predictability and down-cycle resilience justify its current valuation multiple increase (compared to past ). Overall, we believe that Ashtead Group plc’s strong performance in the current market and its promising future prospects make it an attractive investment destination.
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