Ashtead Stock: 20% ROI & Attractive Unit Economics (OTCMKTS:ASHTF)

Dilemma concept

badmanproduction

The following segment was excerpted from this fund letter.


I initiated a starter position in Ashtead, an equipment rental company listed in the UK but with 95% of its operations in the US. The rental equipment market is fragmented but growing and consolidating around the largest two players, United Rentals (URI), with approximately 16% of the market, and Ashtead, with about 12%. The next company only has a 4% share.

Overall, Ashtead has a return on investment in the 20% range, with 27% operating profit margins. Unit economics are attractive. For every $100 Ashtead spends on equipment, it generates $13 of operating profit per year and gets back $35 when it sells the equipment after seven years. Furthermore, Ashtead enjoys considerable economies of scale. As a major equipment OEM customer, Ashtead typically negotiates 15-20% discounts on equipment purchases.

With a higher density of locations and equipment, Ashtead can meet customer needs quickly and maintain high dollar utilization on equipment. In addition, with their significant investments in logistics and technology, they can offer customers better product availability and breadth than smaller competitors can match.

Unsurprisingly, both Ashtead and United are active acquirers of smaller businesses. United makes fewer large deals and has grown a bit faster, while Ashtead prefers more frequent smaller acquisitions, an arguably lower-risk approach. As the industry consolidates more, the top two are better able to enforce price discipline in the market.

From a customer’s perspective, Ashtead frees up capital that would otherwise be tied up with infrequently used ancillary equipment and provide quick and convenient on-demand access. Customers can also forgo maintenance and transportation crews’ expenses and logistical hassles. (A dynamic I am pretty familiar with as an owner/operator of private businesses earlier in my career). In contrast, Ashtead can spread these costs over a large asset base while providing better service and newer equipment. The last point is increasingly important in a world where health, safety, and ESG requirements are increasingly demanding.

Ashtead’s growth strategy centers on expansion into more specialty rentals. This includes portable commercial power generators, climate control equipment, scaffolding, flooring, and pump solutions.

  • First, the specialty segments are much less penetrated in the market than general equipment and have more room to grow.
  • Second, specialty is also less commoditized. For example, clients facing a flooded worksite want to draw on Ashtead’s expertise on how to solve the situation beyond simply renting equipment.
  • Third, specialty diversifies Ashtead’s business away from its traditional focus on construction markets.
  • Fourth, Ashtead “clusters” multiple general and specialty locations in its leading markets, which drives better economics. For example, clustered regions have twice as many customers, 15% more revenue per customer, and 4.5% better margins.

I believe we were able to purchase shares at an attractive price for several reasons. Ashtead’s FCF generation ability is somewhat obscured by growth. There are a few nuances to the whole story, but if one strips out growth capex, the company is very profitable on an FCF basis. The equipment rental industry has been subject to the business cycle.

I won’t pretend Ashtead is immune to market cycles. Still, the growth in specialty, the fact that a large part of its construction end markets is for long-term projects like LNG plants, and a likely secular tailwind from the Federal Infrastructure package and CHIPS act are all likely mitigants.

Finally, an inflationary environment can be good for rentals, given Ashtead’s relative cost advantage and the fact that customers are more inclined to rent than buy during periods of uncertainty.


Disclaimer

Alphyn Capital Management, LLC is a state registered investment adviser.

The description herein of the approach of Alphyn Capital Management, LLC and the targeted characteristics of its strategies and investments is based on current expectations and should not be considered definitive or a guarantee that the approaches, strategies, and investment portfolio will, in fact, possess these characteristics. Past performance of specific investment advice should not be relied upon without knowledge of certain circumstances of market events, nature and timing of the investments and relevant constraints of the investment. Alphyn Capital Management, LLC has presented information in a fair and balanced manner. Alphyn Capital Management, LLC is not giving tax, legal or accounting advice, consult a professional tax or legal representative if needed.

Reference or comparison to an index does not imply that the portfolio will be constructed in the same way as the index or achieve returns, volatility, or other results similar to the index. Unlike indices, the model portfolio will be actively managed and may include substantially fewer and different securities than those comprising each index. Results for the model portfolio as compared to the performance of the Standard & Poor’s 500 Index (the “S&P 500”) for informational purposes only. The S&P 500 is an unmanaged market capitalization-weighted index of 500 common stocks chosen for market size, liquidity, and industry group representation to represent US equity performance. The investment program does not mirror this index and the volatility may be materially different from the volatility of the S&P 500.

Performance results of the master portfolio are presented for information purposes only and reflect the impact that material economic and market factors had on the manager’s decision-making process. No representation is being made that any investor or portfolio will or is likely to achieve profits or losses similar to those shown.

Results are net of all standard fees calculated at the highest rate charged, expenses and estimated incentive allocation. Model portfolio returns are inclusive of the reinvestment of dividends and other earnings, including income from new issues. The return is based on annual returns since inception and does not give effect to high water marks, if any. Returns may vary for investors who are restricted from participating in new issues.

Hypothetical performance results are unaudited and do not reflect actual results of any accounts managed by Alphyn Capital Management, LLC. Hypothetical performance results are for illustrative purposes only and are not necessarily indicative of performance that would have been actually achieved if an investment utilized the strategy during the relevant periods, nor are these simulations necessarily indicative of future performance of the strategy. Inherent limitations of hypothetical performance may include: 1) hypothetical results are generally prepared with the benefit of hindsight; 2) hypothetical results do not represent the impact that material economic and market factors might have on an investment adviser’s decision-making process if the adviser were actually managing client money; 3) there are numerous factors related to the markets in general, many of which cannot be fully accounted for in the preparation of hypothetical performance results and all of which may adversely affect actual investment results.

There is no assurance that any of the securities discussed herein will remain in an account’s portfolio at the time you receive this report or that securities sold have not been repurchased. The securities discussed do not represent an account’s entire portfolio and, in the aggregate, may represent only a small percentage of an account’s portfolio holdings. It should not be assumed that any of the securities transactions or holdings discussed were or will prove to be profitable or that the investment recommendations or decisions we make in the future will be profitable or will equal the investment performance of the securities discussed herein.

The graphs, charts and other visual aids are provided for informational purposes only. None of these graphs, charts or visual aids can and of themselves be used to make investment decisions. No representation is made that these will assist any person in making investment decisions and no graph, chart or other visual aid can capture all factors and variables required in making such decisions.

This report is for informational purposes only and should not be construed as investment advice. It is not a recommendation of, or an offer to sell or solicitation of an offer to buy, any particular security, strategy or investment product. Our research for this report is based on current public information that we consider reliable, but we do not represent that the research or the report is accurate or complete, and it should not be relied on as such. Our views and opinions expressed in this report are current as of the date of this report and are subject to change. Any reproduction or other distribution of this material in whole or in part without the prior written consent of Alphyn Capital Management, LLC is prohibited.


Editor’s Note: The summary bullets for this article were chosen by Seeking Alpha editors.

Be the first to comment

Leave a Reply

Your email address will not be published.


*