US Listing Will Improve Capital Market Access And Liquidity

Key Takeaways

• Moving primary listing to the U.S. aligns operations, potentially boosting financial metrics through better market access and liquidity.
  
• Sunbelt 4.0 strategy and expansion plans enhance operational efficiency and revenue, with share buyback indicating strong capital management.
  
• Higher interest rates and delayed mega projects pressure Ashtead Group's rental revenue growth and overall financial performance, with increased interest expenses and lower used equipment sales also impacting earnings.

Catalysts

Engages in the construction, industrial, and general equipment rental business under the Sunbelt Rentals brand name in the United States, the United Kingdom, and Canada.

• The decision to move the primary listing of Ashtead Group to the U.S. is aimed at aligning with the location of most operations and future growth, potentially enhancing financial metrics through greater capital market access and liquidity. This can influence revenue and earnings positively in the long term.
  
• Implementation of the Sunbelt 4.0 strategic growth plan, with a focus on increasing operational efficiencies and leveraging infrastructure, is expected to support margin improvement and earnings growth.
  
• Expansion plans include the opening of new locations and bolt-on acquisitions, particularly in North America, which are likely to drive revenue growth as these investments begin to yield returns.
  
• A $1.5 billion share buyback program highlights robust free cash flow generation and capital allocation strategy designed to impact EPS positively.
  
• Ongoing diversification efforts beyond traditional construction into large non-construction markets provide significant growth opportunities and could enhance revenue stability and margins.

Ashtead Group Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Ashtead Group's revenue will grow by 5.5% annually over the next 3 years.
• Analysts assume that profit margins will increase from 14.1% today to 16.2% in 3 years time.
• Analysts expect earnings to reach $2.1 billion (and earnings per share of $4.91) by about January 2028, up from $1.5 billion today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as $1.8 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 20.1x on those 2028 earnings, up from 18.3x today. This future PE is greater than the current PE for the GB Trade Distributors industry at 13.7x.
• Analysts expect the number of shares outstanding to decline by 0.75% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.22%, as per the Simply Wall St company report.

Ashtead Group Future Earnings Per Share Growth

Risks

• The local nonresidential construction market has softened due to prolonged higher interest rates impacting local and regional developers, which could negatively impact Ashtead Group's rental revenue growth.
  
• A lower level of used equipment sales has led to reduced gains on sale, affecting the absolute level of EBITDA and operating profit, which may impact the overall earnings.
  
• Interest expenses have increased 14% compared to last year, reflecting higher absolute debt levels, which could further pressure net margins.
  
• The movement of mega projects has been pushed to later dates, which might delay expected revenues and profits from new U.S. projects.
  
• The Sunbelt U.K. business continues to deliver relatively low margins and ROI compared to other segments, which may weigh on overall group financial performance.

Valuation

• The analysts have a consensus price target of £62.69 for Ashtead Group based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of £75.0, and the most bearish reporting a price target of just £45.5.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $12.9 billion, earnings will come to $2.1 billion, and it would be trading on a PE ratio of 20.1x, assuming you use a discount rate of 8.2%.
• Given the current share price of £52.38, the analyst's price target of £62.69 is 16.4% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.