Ashtead highlights rebound of UK Industrial Engineers

Ashtead was a leading stock in the afternoon half of London’s trading session on Wednesday.

The stock climbed to near the top of the FTSE 100 leaders’ board with gains touching 5.6% at one point, an all-time high for the stock, after the release of the British industrial equipment rental company’s quarterly results showed a 33% surge in profit before tax to £120.4m.

The group also said it upgraded its guidance provided to analysts about full-year profits, although it didn’t specify a figure.

The company, together with its close UK peers Weir Group Plc. and IMI Plc., which have also reported results in recent weeks, is emblematic of a sector enjoying resurgent fortunes amid promising data about the pivotal construction industries in the United Kingdom and the United States.

Ashtead benefits from resurgence of construction industry

A report released earlier this week by the US Commerce Department showed construction spending increased 1.8% in July to a five-and-a-half-year high.

Ashtead, which makes 85% of its revenue from its US-based Sunbelt division, said revenues from the business were 22% higher in the first quarter. Ashtead’s A-Plant business in the UK, expanded by 19%.

In Britain, construction output reached its strongest in seven months in August, according to official data released on Tuesday.

Ashtead’s chief executive Geoff Drabble highlighted a trio of positive elements that underscored the strength in the company’s current trading.

“What we are seeing is good end markets, good market share gains from existing stores and a really good pipeline of structural opportunity from bolt-ons and green fields. Those three elements combined, is what is driving our top line,” Drabble said in an interview with the news agency Reuters.

Drabble stressed the firm aimed to capitalise on buoyant end markets by spending at least £100m this year on acquisitions.

That would be on top of increased capital expenditure which would be entirely invested in Ashtead’s machinery fleet and tools businesses to the tune of between £825m and £875m.

A darling of The City, for now

Brokerage analysts reacted to the results with a string of recommendation upgrades with all 14 analysts in a list compiled by Thomson Reuters rating the stock with the equivalent of recommendations to “buy”.

The brokerages seem to downplay the risk that current conditions may represent a high point for the sector, and also for Ashtead.

Instead the analysts suggest the group is correct to make a substantial bet that developed-market industrial capital expenditure with advance significantly.

An additional tailwind for the sector will come in the form an easing sterling exchange rate versus the US dollar.

GBP/USD has continued to decline from highs traded at in mid-July, providing relief for exporters which for several months faced the risk of foreign exchange-related margin tightening as the pound galloped higher against a range of currencies.

It has to be said Ashtead is beginning to look pricey from an admittedly shorter-sighted perspective than makes sense for a firm enjoying such good circumstances.

The yield is a modest 1.5% which surely raises the question of value, but it’s a question which might also be directed at many of Ashtead’s close peers, given their average yield is about 2.4%.

Even so, Ashtead’s chart suggests attempting anything more aggressive, for the moment, than a mere reduction of stock holdings in the medium term, would be a brave gamble.