Morgan Stanley has upgraded its rating for Ashtead Group PLC (LON:AHT) to ‘overweight’ from ‘equal-weight’ in a machinery review focused on the “underappreciated expansion opportunity in data centre construction.”
The US investment bank’s analysts upped their target price for the FTSE 100-listed equipment rentals firm to 3,000p from 2,420p, with the shares currently changing hands at 2,547p, up 4.9% on Thursday’s close.
READ: Ashtead shares sink on US construction concerns, despite good growth in North American business
In a note to clients, the Morgan Stanley’s analysts said that, in their view, data centres are an overlooked structural growth opportunity for US construction equipment rental firms”.
They added: “Our deep-dive into tech company capex and satellite imagery of build sites/expansions highlights how market leaders United - United Rentals Inc. (NYSE:URI) - and Ashtead are ideally placed to benefit.”
The analysts noted that data centre construction is around a $50bn industry in the US, or 20% of US office construction, up from 10% in full-year 2015, with 56% of starts concentrated in eight states.
They also pointed out that average spend per centre has nearly tripled since 2014, and by 2023 hyperscale centres - with the greatest equipment rental needs - should form over half of all centres and mor than 80% of new starts.
The Morgan Stanley analysts said data centre growth is also an equipment rental maintenance and repair (MRO) opportunity, with North American data centres built from 2017-23 providing an estimated MRO spend of $300mln per annum.
More defensive revenue attractions
They added: “Our detailed new research on the branch networks and white space data centre growth prospects gives us conviction that Ashtead and United have more defensive revenue attractions than the market discounts, despite the modest non-resi slowdown we expect.”
The analysts said that United remains a top pick in North American Machinery, and they have raised their full-year 20/21 underlying earnings (EBITDA) estimates to account for extra unit growth.
They noted that the new numbers imply a 0.4 times enterprise value/EBITDA premium for Ashtead over United (5.9x vs 5.5x), with Ashtead's price target-implied price/earnings of 13 times is well within its recent range.
The Morgan Stanley analysts concluded: “Both companies trade near their mid-cycle levels, which we think underplays their increasingly structural growth opportunities as market leaders.”