Full-year results from the Human Screen

The Human Screen thinks plant hire firm Ashtead is a company for investors who like a gamble, and now may not be the best time to gamble.

Highlights

• Adjusted operating profit up 75%
• Return on tangible assets: 8%
• Adjusted net profit of ''88m compared to net cash flow of ''305m (-''11m after net capital expenditure)
• Net debt including approximate capitalised lease obligations of ''292m up 7% at ''1.1bn, 64% of tangible assets
• Per-share dividend up 17%
• The number of shares in issue remained unchanged.

The Human Screen comments:

The Human Screen remembers plant hire company Ashtead, he owned shares in it about ten years ago, just before it cratered in 2003. Articles in the Investors Chronicle showed how the company had inflated profit by reducing its depreciation rate and extracting up-front payments from equipment suppliers, which the company paid in higher purchase prices much later. The value of the plant was written down, and when the economy slowed, Ashtead couldn’t service the debt it had amassed to acquire equipment and Sunbelt, its US operation.

Ashtead survived. It renegotiated its bank covenants, business improved, George Burnett, the man who’d run the company since 1984 retired in 2006, and investors forgave Ashtead. Today it’s touching the highs it last reached in 1998 and Sunbelt, its US operation, second after United Rentals in market share, accounts for 83% of revenue and 96% of operating profit.

In April 2012 the book value of Ashtead’s rental equipment was just under ''1.9bnm which it depreciated by ''175m, so it looks as though the average depreciation rate for rental equipment is 9.5%, which is actually lower than in 2002 (11.25%). That said VP, a more specialised hire company the Human Screen admires, depreciated its rental equipment by 10% in 2012.

Although Ashtead seems to have improved its management of the cycle by financing its operation with bonds, and reducing capital expenditure to pay off debt during downturns, the Human Screen is very wary of cyclical companies reporting record profits. In 2003, Ashtead made heavy losses, and in 2010 it was barely profitable, making earnings an unreliable benchmark for value

At eight times tangible book value it looks as though it’s not just Ashtead that’s anticipating strong growth in US construction markets, investors are too.

More on Ashtead

Annual reports

LON:AHT