Ashtead Group PLC (LON:AHT) said on Tuesday that chairman Chris Cole is to step down as the equipment rental firm raised its full year guidance after hurricanes in the US boosted first half revenues.
The company has started the search for a successor to Cole, who has been chairman since 2007, with the aim of a handover at the annual general meeting in September 2018.
READ: Ashtead to be a clear beneficiary of any US tax cuts
Brendan Horgan, the current chief executive of the Northern American construction equipment rental arm Sunbelt, has been promoted to chief operating officer as part of the group’s long-term succession planning.
Demand supported by hurricanes
Alongside the announcement of the board changes, Ashtead posted a 23% increase in pre-tax profit to £536.9mln at constant exchange rates for the six months to 31 October.
Rental revenue grew 20% to £1.7bn at constant exchange rates, driven by a strong performance in Sunbelt. The business saw increased demand as it was involved in clean-up efforts after hurricanes Harvey, Irma and Maria in the US.
“As we execute our 2021 plan, we expect a number of years of good earnings growth and significant free cash flow generation,” said chief executive Geoff Drabble.
Shares rose 3.07% to 2,081p in morning trading.
Ashtead lifts dividend, announces share buyback
Given the positive outlook, the company raised its dividend by 16% to 5.5p per share and said it would start a share buyback programme of between £500mln and £1bn over the next 18 months.
The group remains “comfortably” within its target range for net debt to underlying earnings (EBITDA) of 1.5 to 2 times at 1.8 times in the first half despite spending £298mln on bolt-on acquisitions. This was supported by strong EBITDA margins, which rose to 49.2% from 48.8% last year.
Drabble said the company has the “flexibility” to be operating towards the upper end of the group's stated leverage range.
Full year guidance raised
“We continue to enjoy support from good end markets, a strong balance sheet and impressive operational execution,” he said.
“Whilst we would anticipate that activity levels would normalise during the second half, post hurricane clean-up, we expect full year results to be ahead of our prior expectations.
“Our strong performance, together with the successful execution of our 2021 plan, allows the board to continue to look to the medium term with confidence."
Ashtead revised its capital expenditure guidance to between £1.2bn and £1.3bn at current exchange rates after it reached the upper end of its expectations in the first half. Capital expenditure was £708mln gross and £649mln net of disposal proceeds, compared to £683mln gross and £631mln net last year respectively.
Liberum maintained its ‘buy’ rating and target price of 2,030p, saying it expects consensus forecasts for fiscal year 2018 to increase by 3-5%.
The broker said the US President Donald Trump’s planned tax cuts should see the group’s effective tax rate fall from around 34% to 23-25%.
“Whilst this benefit is unlikely to be realised until 2019/20, this guidance is likely to be well received by investors as is the planned commencement of a share buy-back programme of at least £500m and up to £1bn over the next 18 months.”
Ashtead needs to protect its balance sheet, says analyst
Nicholas Hyett, equity analyst at Hargreaves Lansdown, said while the share buyback is good news for shareholders in the short-term, “we’re still not entirely convinced about the decision”.
He said Ashtead is a highly cyclical business and it is important to protect the balance sheet even though it’s in a good position at the moment.
“Conditions can change quickly and Ashtead has experience of hitting the downside with too much debt. It wasn’t pleasant,” Hyett said.
“With shares trading above their long term ratings at the moment, albeit only just, it’s not as though the shares are exactly a bargain either.”