Equipment rental group Ashtead has lifted its annual profit forecast, firming up its status as the year’s best performing UK blue-chip stock after proving to be a rare beneficiary of the global supply chain crunch.
Ashtead, which hires out excavators, scaffolding and generators, has surged to the top of FTSE 100 winners this year, adding more than 80 per cent to its share price as builders, farmers and tradesmen pivoted to rentals owing to constricted availability of new goods.
Supply chain issues such as component shortages and logistical bottlenecks have stifled production by makers of construction and farming equipment such as John Deere or CNH Industrial at a time when residential and commercial building markets have been heating up.
Limited equipment supply has pushed up the utilisation rate of Ashtead’s fleet of goods and helped the group to raise prices paid by its customers based in the US, Canada and the UK.
Its pre-tax profits rose to $474m, growing 17 per cent year on year, on revenues that rose 15 per cent to $2bn in the second quarter ending in October, the company said on Tuesday.
That gave Ashtead confidence to increase its annual rental revenue growth guidance to a range of 17-20 per cent, up from 13-16 per cent, driven by acquisition activity, strong demand and higher pricing. Shares in the company rose 3.3 per cent.
Chief executive Brendan Horgan is bullish on the growth for rentals, citing the US infrastructure bill, customers seeking to reduce their environmental footprint by sharing goods and the electrification of industrial goods pricing many out of ownership.
Global supply chain pressures and tight supply of blue-collar workers in the US were unlikely to soften next year, he said, because the market needed $30bn worth of equipment over the next 24 months and more mechanics and drivers retired every year than entered the workforce.
“There exists a perfect storm of challenges in the market. Demand levels, supply constraints and labour inflation. We were purpose built to fix those problems,” he said. “This storm is just beginning. There is not a chance labour constraints are going to subside in 2022.”
Besides container shipping companies that are raking in profits larger than the tech giants this year, there have been few winners from the supply chain turmoil that has dented the profits of manufacturers across the world.
Better known to customers as Sunbelt Rentals, Ashtead was helped early on in the pandemic as it won contracts to supply Covid-19 testing sites with equipment.
Horgan said its pandemic success was down to its diversification into markets beyond construction after the 2008 financial crisis, into areas such as live events, disaster sites, operations management and film production.
The company has been executing an aggressive growth strategy, investing $1.2bn in expanding its sites and equipment base, as well as spending about $750m on small-scale acquisitions this year.
Ashtead has outperformed its big rival United Rentals with the ratio between its share price and forecasted earnings for next year hitting 25 times against about 15 times for the US-based group. The lofty valuation has begun triggering reservations among some analysts.
“The valuation is rich and we are concerned that there could be some as yet unforeseen issues in the future,” said Dominic Edridge, an analyst at Deutsche Bank.