HSBC downgrades Ashtead on equipment age calculation quirk

HSBC has downgraded Ashtead to 'hold' from 'buy' after a reappraisal of the equipment hire group's growth prospects.

The FTSE 100 company's recent share price weakness has been thought to provide a strong buying opportunity, coupled with a structural growth opportunity in equipment rental helped by Ashtead's younger fleet and superior execution than its rivals.

But while HSBC agreed a younger fleet can be a significant competitive advantage in the industry, its research had found that Ashtead's fleet in fact may "not be materially younger than that of the peers, at least on a basis that matters commercially".

HSBC said the while company’s calculation method - where reported age is based on net book value basis - is an acceptable accounting treatment, investors were misreading the figures.

Analysts said the company's calculation method has "under-report the age of rental assets, as newer fleet is weighted on a higher book value basis than older feet", with US unit Sunbelt’s rental assets age looking in-line with the industry, if the age was calculated using the balance sheet.

"If one takes the accumulated depreciation and then divides it by the annual depreciation rate, the resulting asset age implied is broadly similar to the industry peers."

Therefore as this is largely a calculation quirk it "cannot form the basis of any real commercial advantage which drives the growth outperformance", which on closer examination seems to have come from branch expansion.

However, the slowdown in wider equipment markets is coming from oil and gas dependent regions, where Ashtead has smaller exposure.

As such, HSBC saw potential for some relief rally in the shares and cut its price target to 970p from 1,450p, which still offers potential for reasonable upside.