U.K. Industrial Equipment Hire Group Ashtead Upgraded To #BB+# On Strong Operating P Outlook Stable

Stocks and Financial Services Press Releases Tuesday April 18, 2017 17:53
LONDON--18 Apr--S&P Global Ratings

LONDON (S&P Global Ratings) April 18, 2017--S&P Global Ratings today said it has raised its long-term corporate credit rating on U.K. industrial equipment hire group Ashtead Group PLC to 'BB+' from 'BB'. The outlook is stable.

At the same time, we raised our issue ratings on the company's $900 million and $500 million second-lien notes to 'BBB-' from 'BB+'. The recovery rating is unchanged at '2', reflecting substantial recovery (70%-90%; rounded stimate: 75%) in the event of a default.

The upgrade reflects Ashtead's strong operating performance driven by favorable markets and prudent financial policy, resulting in solid profitability and our expectation of positive cash flow generation in the next two years. It is also based on our expectation that Ashtead will maintain credit metrics in line with the rating, with funds from operations (FFO) to debt above 45% and debt to EBITDA below 2.0x in the next two years. We have therefore revised our assessment of the company's financial risk profile to intermediate from significant.

Ashtead's operating performance has been consistently resilient over the last five years. The equipment rental industry has been enjoying positive trends, with the nonresidential construction market remaining strong in the U.S. and U.K. Moreover, an ongoing shift toward renting has provided for additional equipment market penetration and allowed the company to strengthen its positions on the U.S. market. The company has been able to expand sales significantly to £3.5 billion (our estimate for fiscal 2018) compared to sales of about £1 billion in 2011. This has enabled the company to expand margins each year maintaining above average EBITDA margins for the industry. We expect it will continue to post a resilient EBITDA margin over the next few years in the range of 48%-49% on the adjusted basis. We also expect Ashtead to deliver return on capital of about 18%.

Ashtead's capital expenditure (capex) remains elevated to grow its business and take advantage of favorable market conditions. Due to the strong margin expansion, we now think that Ashtead will be able to generate positive free operating cash flows (FOCF) in fiscal 2018 and 2019. Additionally, Ashtead has entered a two-to-three year phase where replacement capex will be lower as Ashtead is mainly replacing fleet bought in 2009, 2010, and 2011--when capital expenditure was low at the bottom of the cycle. Moreover, we expect it to continue to prudently manage its balance sheet. Despite our expectation that the company will continue to make bolt-on acquisitions and pay dividend and repurchase shares, we expect its leverage to remain in line with the company's public guidance of debt to EBITDA of 1.5x-2.0x.

Our view of Ashtead's business risk profile is supported by the group's strong market position in the fragmented U.S. market, and the scale of its operations, which enhances its purchasing power with suppliers. We also view positively Ashtead's strong profitability, which is supported by a competitive average utilization rate--72% for the nine months to Jan. 31, 2016--and a fairly low average fleet age.

We also consider that the company has a fairly flexible business model that allows capex to be lowered during industry downturns. This was evident from its ability to reduce its exposure to the oil and gas markets during the recent downturn.

The company managed to dispose of oil and gas assets while further diversifying in growing markets such as event management. However, the high capital intensity of the equipment rental sector, the cyclicality of its end-markets--mainly nonresidential construction--as well as its limited geographic diversity, are factors that constrain our business risk assessment.

In our base case, we assume:

Real GDP growth in the U.S. of 2.3% in 2017 and 2.4% in 2018.Revenue growth of 13%-15% in fiscal 2018 and 7%-9% in fiscal 2019, driven by a supportive macroeconomic environment, as well as increasing demand for equipment rental, which provides higher market penetration while customers adhere to outsourced model.

We expect this to be realized via same-store growth, green-fields and a moderate amount of mergers and acquisitions.

Reported EBITDA margin above 48%-49% in fiscal 2018 and 2019, driven by strong margins of close to 50% at Sunbelt.Capex of £1.0 billion in fiscal 2018, partly offset by £100 million in disposal proceeds.Positive FOCF in fiscal 2018 supported by growth in margins.Acquisitions of above £200 million in 2018, slightly decreasing thereafter.

Cash-tax rate of 6%-7% for 2017, 28%-32% for 2018, and 34%-36% for 2019, depending on the level of capex.Increasing dividend outflows, in line with earnings, of about £135 million in fiscal 2018. Based on these assumptions, we arrive at the following credit measures: FFO to debt of about 45%-50% for fiscal 2018 and 2019.Debt to EBITDA of 1.5x-2.0x for fiscal 2018 and 2019.

The stable outlook reflects our expectations that Ashtead will continue to cement its positions in the U.S. and the U.K., maintaining robust operating performance over the next 12 months thanks to favorable markets. This should result in the FFO to debt above 45% and debt to EBITDA below 2.0x. We also anticipate that Ashtead will balance the level of capital investments with cash flow generation, and maintain stable EBITDA margins. Positive FOCF would also be a supportive factor.

We could lower our ratings if Ashtead's operating performance deteriorates or if an unexpected increase in fleet capex, dividend payout, or acquisition occurs. More specifically, we would consider a downgrade if the company revised its internal leverage policy upward or failed to adhere to its leverage target on a consistent basis without expectation of recovery.

We could also lower the ratings if the company continuously generates negative FOCF or consistently falls below our expectation of debt to EBITDA above 2x and FFO to debt below 45%. Although unlikely, we would consider an upgrade if Ashtead tightened its leverage targets and exhibited adjusted debt to EBITDA below 1.5x and FFO to debt well above 60% on a consistent basis.

An upgrade would also depend on the company balancing the level of capital investments with cash flow generation.

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