Fitch Ratings has affirmed Ashtead Group plc's Long-Term Issuer Default Rating (IDR) at 'BBB' with a Stable Outlook.
Fitch has also affirmed the senior notes issued by Ashtead Capital, Inc. that are fully and unconditionally guaranteed by Ashtead at 'BBB'.
Key Rating Drivers
Ashtead's Long-Term IDR reflects its good franchise as a leading equipment rental firm in the well-established and structurally growing markets of the US, UK and Canada. The rating also reflects Ashtead's robust financial metrics weighed against the cyclicality of its business model and the need to manage a substantial capex programme and related funding through economic cycles.
Growing Franchise: Ashtead is listed in the UK but generates around 85% of revenue from the US, where it is the second-largest equipment rental company with a 13% market share, trading under the Sunbelt Rentals brand. Ashtead has been expanding its franchise in North America, which has good structural growth prospects for equipment rental firms following a number of legislative acts aimed at improving infrastructure, reducing inflation and onshoring manufacturing and production.
Ashtead's market positioning and scale give it a degree of bargaining power with equipment suppliers, which has proved beneficial during equipment supply shortages, as well as enabling it to serve a range of customers. The company has been increasing its share of US mega projects in recent years.
Exposure to Construction Market Cyclicality: Ashtead's key business line, accounting for around 40% of revenue, focuses on providing rental equipment for construction projects which can be cyclical in nature. Management has been growing the non-construction and less cyclical specialty business lines, which include equipment provision for live events, building maintenance and emergency response. This should benefit equipment utilisation rates and stability of revenue over economic cycles.
Equipment rental firms have been benefiting from an overall structural shift in the construction market towards renting rather than buying equipment, which has been enhanced recently by supply shortages, rising equipment prices and higher funding costs as well as increasing equipment regulation. Fitch believes that rental penetration rates could increase further, particularly in the North American markets.
Robust Profitability: Profitability margins declined modestly over the nine months to 3Q24, primarily due to lower than expected utilisation rates caused by largely one-off factors, for example, strikes by the Writers Guild of America and Screen Actors Guild negatively impacting equipment supplied to film sets as well as lower levels of emergency response activity. Inflationary pressures, in particular stemming from labour costs, and higher funding costs, also added to profitability declines.
Nevertheless, profitability, as measured by EBITDA to revenue, has consistently been good (3Q24: 44%; 30 April 2023 (FY23): 45%), supported by generally solid utilisation rates, Ashtead's ability to extract economies of scale and robust rental rates in key markets. Ashtead does not incur significant impairment charges as the key balance sheet risk relates mainly to the valuation of equipment held. Fitch views Ashtead's valuation and depreciation policies as robust, with consistent gains on the sale of second-hand equipment.
Leverage to Remain Within Target: Fitch mainly uses EBITDA-based metrics in assessing Ashtead's leverage, due to the cash flow-driven nature of its business. The gross debt/EBITDA ratio was 1.8x at end-January 2024 (FYE23: 1.5x). Leverage could increase as capex grows but Fitch expects it to remain within management's target range of 1.5x-2x net debt to EBITDA. Fitch regards Ashtead's capex as well-managed, although risks associated with investment in and funding of multi-year assets subject to variable demand cannot be wholly offset.
Complementary Leverage Metrics: Fitch also monitors debt/EBIT on the basis that Ashtead's fleet depreciation has some characteristics of an operating expense, in view of the long-term importance of sustained capex to maintain an attractive fleet. Fitch calculates debt/EBIT at end-January 2024 at 2.6x (on the basis of annualisation of nine-month EBIT), compared with 2.3x at FYE23. This ratio rises to 3.4x at end-January 2024 (FYE23: 3.1x) post IFRS16 inclusion of lease liabilities.
As a complementary metric Fitch considers balance-sheet leverage, as measured by gross debt to tangible equity, which at end-January 2024 was 2.8x (FYE23: 2.5x). It has risen as goodwill on Ashtead's various bolt-on acquisitions and the resumption of the company's share buyback programme have prevented tangible equity growing as quickly as debt. However, the ratio remains well below 3.4x at FY20.
Adequate Liquidity: Ashtead's principal sources of funding are a USD4.5 billion asset-based senior secured revolving credit facility (ABL facility) and USD6.2 billion of senior notes, so funding is reliant on wholesale market confidence for renewal. However, active refinancing during 2022, 2023 and 2024 has extended maturities to an average six years. Furthermore, the business generates significant cash flow and the interest coverage, as calculated by EBITDA to interest expense, has consistently been greater than 10x.
RATING SENSITIVITIES
Factors that Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade
Ashtead's gross debt/EBITDA ratio approaching 2.5x without a clear route to near-term reduction, and without material cash being held
Significant shortening of Ashtead's long-dated debt maturity profile
Evidence of unexpected liquidity pressure, such as from heavy investment in new fleets without generating anticipated revenue
Factors that Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade
An upgrade is unlikely in the near term. It would require an upward reappraisal of the through-the-cycle business stability achievable within the equipment rental sector, in addition to Ashtead maintaining EBITDA growth while retaining leverage at the lower end of management's stated target range of 1.5x to 2x net debt to EBITDA.
DEBT AND OTHER INSTRUMENT RATINGS: KEY RATING DRIVERS
SENIOR NOTES
Ashtead Capital's notes are fully and unconditionally guaranteed by Ashtead and are rated in line with Ashtead's Long-Term IDR on average recovery prospects. As unsecured obligations, they rank behind Ashtead's ABL facility, which benefits from security over most group assets.
DEBT AND OTHER INSTRUMENT RATINGS: RATING SENSITIVITIES
SENIOR NOTES
The rating of Ashtead's senior notes is mainly sensitive to changes in the company's Long-Term IDR. Additionally, weakening in the recovery prospects of the notes, for example due to a material increase in the relative size of Ashtead's ABL facility, could lead Fitch to notch the notes' rating down from the Long-Term IDR.
ADJUSTMENTS
The earnings and profitability score has been assigned below the implied score due to the following reason: revenue diversification
The funding and liquidity score has been assigned below the implied score due to the following reason: business model/funding market convention
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the Applicable Criteria.
ESG Considerations
The highest level of ESG credit relevance is a score of '3', unless otherwise disclosed in this section. A score of '3' means ESG issues are credit neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. Fitch's ESG Relevance Scores are not inputs in the rating process; they are an observation on the relevance and materiality of ESG factors in the rating decision. For more information on Fitch's ESG Relevance Scores, visit https://www.fitchratings.com/topics/esg/products#esg-relevance-scores.
ASHTEAD GROUP PLC 
