Ashtead Technology Holdings PLC (LON:AT) is Alright
Ashtead Technology Holdings PLC is an offshore energy rental equipment company. The offshore energy market is undergoing a renaissance due to high oil and gas prices and the stock has a price-to-earnings ratio (PE) of 12.3 based on 2023 consensus earnings-per-share (EPS) of 23.6 pence. Adjusted EPS was 13.2 p in 2021 which (excluding covid impacted 2020) was close to the trough of the prior cycle. Therefore, the stock is also trading at a PE of 22.0 based on bottom of the cycle earnings.
Ashtead Technology arrived on London's AIM market at the end of 2021. The reason it listed was to provide an exit to private equity groups Buckthorn and APICORP. The IPO price was 162 p and today the share price is 79% higher at 290 p. The vendors have taken every opportunity to sell down their stake further since listing but still retain a significant holding. Buckthorn and APICORP acquired the company in 2016 at a time when offshore oil and gas was deeply out of favour. Therefore, although their purchase price was not publicly disclosed, Ashtead Technology has likely been a highly successful investment for the pair.
The energy sector has been one of the few areas to generate good returns since the start of 2022 and has attracted plenty of capital betting on the start of a new "super cycle". This view is based on the theory that there has been chronic underinvestment since 2014, initially due to low oil prices following the shale revolution and more recently due to greenies being thick. Whilst greenies are still too stupid to understand the importance of energy security, the demonstrably imprudent shale CEOs of the previous boom are now disciplined capital allocators. Or so the story goes.
Over the past week the Brent Crude price has tripped, falling over 10% to around $72 and is down roughly 40% from the Ukraine invasion induced peak of a year ago. Meanwhile, yield curves are beginning to steepen following a sustained and deep period of inversion portending to imminent recession. Some of the speculative positioning in energy markets is likely starting to unwind.
The Ashtead Technology investor material emphasises three core addressable markets being offshore wind, oil & gas decommissioning and oil and gas inspection, repair and maintenance (IMR). There is little attention given to oil and gas construction, presumably since this is the most volatile piece with the worst longterm prospects. However, Ashtead Technology's equipment is relevant to the construction phase as well as IMR and decommissioning within the offshore oil and gas lifecycle. Indeed, in the half year results to June 2022 oil and gas derived revenue grew 29.8%, faster than wind at 25.6%.
So far so bleak, but there are some reasons for investor optimism. Firstly, a third of Ashtead's revenue comes from offshore wind which is undergoing structural growth and the vast majority of Ashtead's technology can be used for both oil and gas and wind mitigating obsolescence risk. Secondly, decommissioning is also a structural growth opportunity albeit smaller in size. So perhaps we can say that 40% of Ashtead's revenue is enjoying energy swap tailwinds.
Modelling revenue forecasts for the structural and cyclical elements of the business leads me to believe that assumptions behind the cyclical uplift factored into broker forecasts for 2023 are reasonable. Furthermore, if I make conservative assumption regarding structural growth and cyclical impacts over the following few years I get a smooth growing revenue profile overall with no cliff if oil and gas prices extend their slump.
Margins will fluctuate through the cycle and are likely towards the upper end of their range at the moment given supply chain challenges and the current upswing. But the effect is not major given gross margins have fluctuated between 72% and 75% from 2018 to the first half of 2022. Furthermore, in the first half of 2022 gross margins were 73.4% which is below the 75% recorded in 2019.
It gets better. There is an increasing propensity for customers to rent rather than purchase equipment, a trend that has been present for some time in more conventional equipment rental markets. Renting makes sense for customers because it lowers capex and boosts return on capital and cash flow. It also avoids the need to maintain and ensure health and safety standards are upheld on ageing kit. The advantages of renting are even more pronounced during uncertain times as is the case in the offshore energy industry today.
The offshore oil and gas sector is not much of a draw for aspiring university graduates given perceived notions of industrial decline and environmental harm. This is nothing new and probably translates to a growing skills drought which again plays into the hands of Ashtead. Much of Ashtead's equipment is complex in nature such as robotics and remotely operated vehicles and the company employs smart engineers to look after and use it to solve customers' specific problems. The harder it is for customers to recruit and retain their own engineers, the more likely they are to seek out Ashtead's products and services.
Ashtead intends to augment growth via small scale acquisitions which is a proven model in other equipment rental businesses. There are scale advantages to be had in terms of greater customer choice and more extensive geographical coverage enabling the transport of equipment to where it is needed. Relatively high capital requirements also favour larger outfits such as Ashtead who enjoys the largest independent fleet of 17,000 items. The two acquisitions completed since listing have been done at modest single digit multiples which provides further reason for optimism that the strategy will work.
I think this cyclical and capital intensive business is improving. It is increasingly exposed to longterm growth trends and is strengthening its competitive position. The stock price is reasonable if I'm right that 2023 numbers do not represent a sharp peak but rather a gentle undulation in the foothills of the great energy challenge. I intend to hold my shares despite the gathering storm clouds.
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