Morgan Stanley hikes target for Ashtead, but highlights 'maturity' of cycle

Analysts at Morgan Stanley hiked their target price on Ashtead but stayed at 'equalweight' on the shares due to the maturity of the current cycle.

All of the broker's gauges of demand for the sector were showing strength, including the two with the highest correlation to non-residential spending, its non-residential permits index and the Dodge Momentum Index, although they were becoming mixed.

Likewise, its proprietary composite capex plans index - which tended to lead growth in outlays on equipment by three months - had hit an all-time high of 34.2 in February.

However, since 1970 the average cycle had lasted seven years, with the peak being reached halfway through, save for the one between 1993 and 2003.

Because of that, they believed it prudent to apply a 20% discount to the shares' relative valuation to the markets.

Given how the shares were now trading at a 29% discount, versus a long-run average of 12%, that yielded a target price of 1,940p (5% below their then current level), Morgan Stanley said, which implied an EV/EBITDA multiple of 11.7.

The new target price was 5% below the shares' then current level but well above their previous target of 1,375p.

Morgan Stanley also pointed to the recent strong results published by sector peer United Rentals, which had shown the first rate increases across all regions for "the first time in years".

The broker further pointed out the high, roughly 90%, correlation between United Rentals' organic rate of growth and the rate of growth in sales in the US Sunbelt region.