Ashtead Group Upgraded To 'BBB-' On Continued Strong Operating Performance; Outlook Stable

  • Given the favorable fundamentals in the U.S. equipment rental market, we expect Ashtead Group's performance to remain resilient, supported by conservative financial policies.
  • As a result, we are raising our long-term issuer credit rating on Ashtead to 'BBB-' from 'BB+'.
  • We are also affirming our 'BBB-' ratings on the second priority bonds, despite expected collateral fall away.
  • The stable outlook reflects our expectation that Ashtead will cement its position in the U.S. market and post robust operating performance over the next 24 months. We also anticipate that Ashtead will balance the level of capital investments with cash flow generation, and maintain stable EBITDA margins with leverage of below 2.0x and FFO to debt comfortably above 45%.
LONDON (S&P Global Ratings) April 23, 2019--S&P Global Ratings today took the rating actions listed above. The upgrade incorporates our view that Ashtead is well positioned to benefit from growth prospects in its U.S. market. Underlying trends favor rental of construction and industrial equipment, rather than purchase, and we consider this, combined with increasing market penetration, will help Ashtead achieve more stable earnings. We project Ashtead's revenues will grow by 17% for the financial year (FY) ending April 2019 (£4.1 billion-£4.3 billion) and 12%-15% in FY2020 and FY2021. This will enable Ashtead to maintain above-average adjusted EBITDA margins compared with the industry average of 30%-40%. We expect Ashtead's EBITDA margins to remain at 49%-50% on an adjusted basis over the next few years. Ashtead has demonstrated its ability to maintain a supportive financial policy and has a target leverage ratio of 1.5x-2.0x.
We expect Ashtead to maintain solid credit metrics over the next two-to-three years and to pursue supportive financial policies. We see funds from operations (FFO) to debt of comfortably above 45% and debt to EBITDA of below 2.0x as consistent with our 'BBB-' rating.
Our view of Ashtead's business risk profile is supported by the company's strong market position in the fragmented U.S. market and the scale of its operations, which enhances its purchasing power with suppliers and its proximity to the customers. The industrial equipment rental market is dominated by smaller players and the Top 3 players--United Rentals, Sunbelt (Ashtead), and Herc Rentals--have a combined market share of only about 25%, taking into account United Rentals' acquisitions.
The scale of Ashtead's business and its access to capital should enhance its competitive strength and help it to expand its market share. We also view positively Ashtead's above-average profitability, which is supported by a competitive average utilization rate of 60%-70% through the cycle, and the relatively low average age of its equipment fleet.
The company's flexible business model enables it to lower capital expenditure (capex) during industry downturns. It demonstrated this flexibility during the recent slowdown, when it managed to dispose of oil and gas assets while further diversifying in expanding markets, such as event management. However, the high capital intensity of the equipment rental sector, the cyclicality of its end markets--for example, nonresidential construction--and its limited geographic diversity constrain our business risk assessment.
In the eight years since the last downturn, Ashtead has gained scale, expanding to almost four times its previous size. Sales increased to £3.7 billion in FY2018 from £950 million in FY2011. It combined this growth with a steady rise in profitability--its S&P Global Ratings-adjusted EBITDA margins improved to 49% in FY2018, from about 34% in FY2011.
Ashtead's capex remains elevated as it seeks to expand its business and take advantage of favorable market conditions. Due to strong margin expansion, we now think that Ashtead will be able to report positive free operating cash flows (FOCF) of about £350 million-£600 million in FY2019 and FY2020. Moreover, we anticipate that Ashtead will manage its balance sheet prudently. Despite our expectation that Ashtead will continue to make bolt-on acquisitions, pay dividends, and repurchase shares, we expect the company's leverage will remain in line with its public guidance of debt to EBITDA of 1.5x-2.0x.
The stable outlook reflects our expectation that Ashtead will continue to cement its position in the U.S. market, while posting robust operating performance over the next 24 months. We also anticipate that Ashtead will balance the level of capital investments with cash flow generation, and maintain stable EBITDA margins and positive FOCF. Leverage of below 2.0x and FFO to debt comfortably above 45% is consistent with the current rating level.
We could lower the rating if Ashtead's operating performance deteriorates, or if the company fails to maintain its leverage at levels consummate with the rating at 1.5x-2.0x (excluding the impact of International Financial Reporting Standards [IFRS] 16). We would also consider lowering the rating if the company fails to achieve our forecast of FFO to debt comfortably above 45% over the next 12-18 months.
Although unlikely over the next two years, given the investment necessary to fund growth opportunities, we could raise the rating if the group further reduced debt and its operating performance exceeded our current base-case assumptions, resulting in FFO to debt consistently above 60% and debt to EBITDA below 1.5x. This scenario implies continued solid operating performance, ongoing healthy cash generation, and a further reduction of adjusted debt. In addition, this would likely require a supportive financial policy framework. A higher rating would also depend on company's ability to expand scale and diversity, and maintain current profitability level.
Ashtead Group is a U.K. headquartered, U.S.-focused equipment rental company that rents a range of construction and industrial equipment. It serves construction, industrial, and homeowner customers, as well as government entities and specialist contractors.
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