Ashtead: hiding in plain sight
- As active, long-term, growth investors, we focus on identifying the best British firms, many of which fly below the radar
- Growth companies come in different guises, Ashtead is an example of a quality compounder
- Founded in the British village of Ashtead, Surrey, in 1947, Ashtead is now the largest equipment rental company in the UK and the second-largest in the US, with stores across 49 states
All investment strategies have the potential for profit and loss, capital is at risk. Past performance is not a guide to future returns.
How often have you walked past a construction site and – while annoyed at the traffic chaos it has caused – been impressed by the huge metal wheels on the excavators and the soaring height of the manlifts? Or perhaps that’s just me.
All this, from industrial-sized cranes to cordless drills, is the bread and butter of Ashtead Group. The company buys industrial equipment from manufacturers and rents it out, mostly to the US construction market. Why have we picked this UK stock for our portfolios? With construction being a highly cyclical industry, it doesn’t seem to fit the typical secular or rapid growth mould.
But as active, long-term growth investors, we believe that growth companies come in different guises. Ashtead is an example of a quality compounder with a track record of delivering compound annual growth in revenue and earnings of 16 per cent and 22 per cent respectively over the past 10 years. The typical short-term focused market tends to underestimate the value of companies that can deliver this type of compound growth over many years.
With its customer-focused culture and strong financial track record, we believe that Ashtead is well-placed to benefit from the structural progression towards increased penetration of the rental market, underpinned by compelling economic and regulatory drivers. In addition, we see it as one of the leading consolidators in this very fragmented industry. We believe its scale and continued investments make it very hard for smaller ‘mom-and-pop’ competitors to match the breadth and availability of the equipment and high value-added services it provides. We see scope for the company to double its market share again over the next decade and do not believe this potential is reflected in the valuation.
The future growth runway: a shift to renting from owning
Better known to US and UK customers as Sunbelt Rentals, Ashtead is the leading equipment rental company in the UK and second largest in the US. The rental market still only makes up 55 per cent of the US market, compared to 75 per cent in the UK, but the US rental market is seven times bigger than the UK’s. We believe the business is in a good position to benefit from a structural shift towards rental, which provides a long runway for growth in the future.
The business of rental
For Ashtead’s typical construction company customer, renting equipment allows it to outsource the management of its fleet of equipment easily and reliably. This is an important service, as equipment needs vary depending on the size of a project.
For instance, upon winning a mega project (more than $400m in value), a company must buy a lot of machines and equipment from different makers for delivery at short notice. In most cases, supply is limited and requires a long lead time. By outsourcing these operational challenges to Ashtead, the company can focus on its core job of construction.
In addition, switching to rental helps the company shift capital expenditure to operating expenditure. Arguably, this is easier on short-term cash flow and the balance sheet.
Poised to gain market share
Ashtead’s edge is its scale. Few peers can rival its large inventory of equipment and its operational ability to service the demands of a variety of customers, including mega projects. It offers customers convenient and reliable access to a broad range of quality products. In addition, Ashtead has built a network of equipment supply and long-term relationships with original equipment manufacturers (OEMs). This allows it to offer customers access to large, expensive equipment – the type most vulnerable to supply constraints. It can thus both satisfy customer needs and help manage their supply chains.
After years of strategic acquisitions and investment, Ashtead has successfully increased market share, particularly in the US, where it has invested a total of $1.1bn on 50 bolt-on acquisitions and expanded its footprint to 165 locations. As a scale player, it benefits from the uptick in US mega projects triggered by recent US legislative acts driving around $2tn of huge infrastructure projects over the next few years. The company expects to double its market share based on these projects.
Always seeking growth
Ashtead’s core customer base has been the construction industry. The company continues to increase its rental penetration there, but growth businesses never rest on their laurels. Acknowledging the cyclical exposure in its core business, Ashtead has been diversifying its revenue mix into new segments in the non-construction end markets.
One of Ashtead’s fastest-growing rental revenue streams in these new segments is in the commercial floor-cleaning equipment used in airports, hotels, warehouses, etc. The profitability of Ashtead’s equipment rental business model is often underappreciated here. The company buys the machine, which tends to pay for itself early in its lifespan and earns rental income for a good number of years before it is sold on, albeit at a small discount. This business model works for Ashtead, especially due to its scale and access to both supply and demand for the machines.
This process is repeated across an increasing inventory of kit, in what the company categorises as speciality businesses, including heating and ventilation systems and temporary power solutions. The potential runway for growth in these lowly-penetrated segments is strong. The firm is gaining traction in capturing growth opportunities in these products and they make up an increasing portion of their business.
Non-construction end markets now account for around 60 per cent of its revenues. Within this figure, the company has enjoyed great success in the areas of speciality rentals where the concept of rental equipment is still nascent. Today, that speciality now accounts for 30 per cent of its revenues compared to just 13 per cent back in 2008. When you also consider that over that period overall revenues more than quadrupled, the growth in the speciality category is even more impressive.
Strong culture across the firm
We believe that the quality of a company’s people is a key driving force for innovation and ambition behind successful growth. We see this strong culture across Ashtead.
In our recent visit to its US headquarters in Charlotte, South Carolina, with chief executive Brendan Horgan and chief financial offer Michael Pratt among many other employees, the strong culture built around customers and staff came across clearly. Workers at all levels focus on customers and growth opportunities in rental equipment. Remuneration and organisational structure are strongly aligned with customers, and employees are led by a stable homegrown leadership team. Most managers have over 20 years’ experience in the business. This is an important competitive advantage and will help sustain Ashtead’s steady growth in the next five years and beyond.
So, the next time you’re passing a building site or going through an airport or hotel lobby in the UK or the US, look out for the bright green and yellow Sunbelt Rental kit. Ashtead may not be a household name, but it is one of the UK market’s most exciting growth stories.
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