Broker tips: Ashtead, Superdry, ASOS
Brokers have backed Ashtead Group’s booming US business after the rental company posted a strong set of interim numbers and upped its full-year targets.
Interim pre-tax profits at Ashtead, which loans industrial equipment such as diggers and other construction tools, surged 25% to £610m, while group rental revenues were ahead 18% at £2.04bn.
The group also struck a bullish note for the health of the wider construction sector and said it expected to beat its own expectations for the full year.
Most of the growth has come from Ashtead’s US division Sunbelt, which has been investing in equipment and expanding its Canadian presence.
Nicholas Hyett, equity analyst at Hargreaves Lansdown, said: “Ashtead is one of the most heavily US exposed businesses on the UK stock market, and as Trump’s America enjoys a tax cut-fuelled investment boom, that’s stood it in great stead. Investment has dramatically increased the kit Ashtead has available for rent and both the US and Canada have seen the amount of equipment on rent at any one time increase.”
Hyett warned that higher investment meant debt had reached £761m, leaving Ashtead “more vulnerable to a downturn” but added that: “Overall it looks like Ashtead’s bet on US growth is paying dividends, and there is little sign in these numbers that the boom has run its course.”
RBC Capital Markets, which has an ‘outperform’ recommendation on Ashtead and a price target of 2,800p, said: “The market is clearly beginning to discount the end of the cycle in the US.”
But it reiterated its recommendation, arguing that much of the risk was already being factored in.
Ahead of its interim results on Wednesday, Superdry suffered heavy losses as Berenberg downgraded its stance on the fashion retailer to 'hold' from 'buy' and cut the price target to 950p from 1,200p following an "annus horribilis" for the group.
"We believed the ongoing operational improvements were sufficient to support high single-digit sales growth, but we had underappreciated the extent of the product repositioning required," it said.
The bank said it was cutting its earnings per share forecasts again, by 8%/13%/10% in FY19E/FY20E/FY21E to reflect ongoing weakness across the UK retail market, as well as its understanding that the current strategy could take another 12 months to come to fruition. This leaves Berenberg 12%/18% below FY19E/FY20E consensus.
"With this in mind, while we believe there is upside to valuation once trading improves, we see potential for negative rather than positive catalysts on the horizon and downgrade to hold," it said.
It pointed to Superdry's warning back in October that unseasonably hot weather across the UK, Europe and East Coast of the US had affected demand for its autumn/winter products, particularly jackets and sweats that typically account for 45% of annual sales.
Berenberg said that while it's difficult to track the short-term weather impact, retail sector data, along with comments from AB Foods' Primark, provide little evidence to suggest trading conditions have improved since the company's last trading update. The bank also took issue with Superdry's "over-reliance" on winter clothing.
ASOS shares slid on Tuesday as Morgan Stanley chopped its price target on the online fashion retailer to 3,200p from 5,000p as it becomes increasingly concerned about cash flows.
The bank, which rates the stock at 'underweight', said that despite slower growth, ASOS no longer seems able to self-finance its expansion as it has done for the last 15 years and appears to be burning through cash.
ASOS had £173m of net cash on its balance in September 2016, but burned through £13m in FY16/17 and a further £117m in FY17/18, leaving it with just £43m in September this year.
MS noted that ASOS has spent more on capex in the last two years - around £400m - than in the previous 15 put together. However, only one-third is going on new warehouses, it said, adding that the proportion of total spending being capitalised has risen from 9% to 17% over the last three years.
As a result, "something's got to give," MS said. "Having increased its borrowing facility to £150m, it has sufficient liquidity for the near-future. However, we now expect circa £90m of net debt in August 2020, when ASOS could find itself uncomfortably tight on liquidity ahead of peak trading. Unless cash flows improve, it may have to scale back its spending and growth ambitions."
The bank cut its earnings forecasts by between 7% and 17% over the next three years, leaving it 26% below consensus earnings by FY20/21.