Should you invest in Ashtead? Your options explained

Ashtead operates in the notoriously cyclical construction industry, yet its shares have been a steady compounder in investors’ portfolios, delivering returns of 490 per cent in the past decade, compared with 81 per cent from London’s benchmark index. Many other companies will look enviously at those numbers, keen to know how this FTSE 100 equipment rental supplier has been able to thrive so impressively.
The company, founded in 1984 and listed on the London Stock Exchange two years later, sells equipment to customers in the non-residential construction markets. Companies can rent scaffolding, forklifts and generators and Ashtead caters to a huge variety of sectors, including to clients in film and television.
Although listed in London, the lion’s share of its profits come from the United States, where it trades under the Sunbelt brand. In its last financial year, $4.4 billion of its $4.9 billion in adjusted cash profit came from America. Canada and Britain contributed $269 million and $250 million, respectively.
Its adjusted cash profit margin has been consistently high, at 45 per cent across the whole group last year. The return on investment, which measures how effectively it generates profits from its fleet, tends to move up and down according to the economic cycle but still stood at a respectable 16 per cent last year.
Ashtead has been spending more money on increasing its fleet size, as well as buying smaller companies to consolidate its position in the US. And it is at this end of the market where the group is eyeing growth. Since 2010 Sunbelt’s American market share has increased from 4 per cent to 11 per cent, second only to United Rentals, which has increased its share from 5 per cent to 15 per cent. The top ten biggest companies control around roughly two fifths of the market.
The London-listed group reckons that as much as 42 per cent of the market is still in the hands of small, independent companies, many of which are likely to be bought by industry pace-setters, especially as lead times for equipment have become more difficult for smaller companies to manage since the pandemic. In its last financial year the group spent $905 million on bolt-on acquisitions.
Potential investors should be aware there has been much debate around how Ashtead’s bosses are paid, with reports suggesting that it had considered moving its listing to New York, where executives typically are paid more. Brendan Horgan, Ashtead’s boss, was paid $8.1 million last year, compared with Matthew Flannery, of United Rentals, who is said to have made an estimated $11 million.
Last week shareholders voted in favour of a new remuneration policy to bring Ashtead more in line with its peers in the US. Overall, Horgan’s package is now worth roughly $14 million. Only 2 per cent of those who voted were against the policy.
There has been some concern around Ashtead’s recent trading, as higher interest rates can translate into a higher risk of overcapacity in its fleet. The company reported a small rise in revenue in a quarterly update last week, up 2 per cent to $2.8 billion. Underlying operating profit dropped by 2 per cent to $717 million, which the company blamed on lower used equipment sales and higher total costs.
Over its 40-year history Ashtead has proved that it can produce reliable returns for shareholders even during periods of economic strain. This goes some way to explaining why the shares trade at a premium to those of United Rentals, despite having a similar level of profitability and growth outlook. In this light, an investor who is willing to shop abroad may consider United shares as better value, at a forward price-to-earnings ratio of 15.4 compared with Ashtead’s 17.8. However, for those set on London’s market, Ashtead still seems a good proposition and the multiple on the shares is lower than its five-year average of 19.1. Advice Buy Why Proven resilience and growth opportunity
Costain has endured a volatile time as a public company. The infrastructure and engineering specialist suffered particularly during the pandemic, issuing a £100 million rights issue as its revenue and profits were falling fast, but it has staged a remarkable recovery in the past year, more than doubling in value.
The group, which can trace its origins to 1865, helps with infrastructure projects such as the construction of roads and bridges. It works closely with big water companies, as well as with Transport for London and Network Rail.
Investors have flocked back to the stock in recent months, helped by the return of dividends and the company broadening its customer base away from the Department for Transport.
Stepping back from government projects meant revenues slipped by 3.8 per cent in the first half of the year, but overall its adjusted operating profit was up by 9 per cent to £16.3 million and its adjusted operating margin improved from 2.3 per cent to 2.5 per cent, on its way to hit its target of 3.5 per cent and 4.5 per cent by 2024 and 2025, respectively.
Since this column last tipped Costain in August last year, the shares have roughly doubled in value. It still has a relatively cheap valuation of just under nine times forward earnings, especially given that in its most recent update it said that its total order book and preferred bidder book together were worth £4.3 billion, helped by a surge in demand from water companies. That does not include £500 million of new work from Southern Water that it secured in the second half.
This improved visibility on revenues is tempting, but it may be hard for some investors to shake off the memory of Costain’s mixed track record on contractual issues. In 2021 it fell to a deep half-year loss over late and over-budget projects on the A465 and a National Grid gas facility in Cambridgeshire. With the impressive rally in the stock over the past 12 months, now could be a good time for more cautious investors to take profits.Advice HoldWhy Impressive rally since last recommendation