Ashtead Technologies Holdings Balance Sheet Analysis

Description

Thesis

Ashtead Technology is a subsea equipment rental company with a 40-year history. Since initiation of its M&A strategy in 2017, it has compounded revenues at 45% and EBITA at 63% to 2024. Since IPO in 2021, revenues have compounded at 44%, EBITA and EPS at ~50%. Importantly this growth has been realised through own cash flows and debt, no equity dilution. The share price however, has fallen 42% from its 52-week highs to around its 52-week low, while fundamentals remain extremely strong.  I expect double digit organic growth for the next five years, with M&A providing additional growth. Given their competitive position and growth potential, the business is severely mis-priced. It currently trades at 11x 2024 earnings and 9.6x run-rate earnings including the contribution of the meaningful acquisition of Seatronics in Nov 2024. Over a five-year horizon, I expect an IRR of ~38% driven by EPS compounding of 20% a year (50% organic and 50% M&A) and multiple expansion to ~20x earnings.

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History

Ashtead was founded in 1985 and from 1990 to 2008 was owned by its better-known namesake, Ashtead Group. Phoenix Equity Partners acquired the business in 2008, as Ashtead Group divested the business considering it non-core. Phoenix over levered the business and during the oil price crisis of 2016, sold the business to Buckthorn partners (and Arab Petroleum Investments). Buckthorn instituted an M&A strategy to roll up the fragmented Subsea rental market which has been enormously successful. Buckthorn exited through 2022 and 2023 having achieved a meaningful return over a seven-year period.

What does the business do

Ashtead Technology makes money primarily (~80% of revenue) by renting out equipment for subsea work in the offshore oil & gas (O&G) services and offshore wind services industries. Most of the equipment (>85%) is fungible between O&G and renewables applications. As of FY23, the company had ~23,000 pieces of equipment in its rental fleet. Non-rental revenue is generated through equipment sales and services, such as on-site and remote engineering, as well as software subscriptions (mostly on the asset integrity side). Their rental equipment is further broken down into Survey and Robotics (~55% of rental revenues) and Mechanical solutions (~45% of rental revenues). The Survey and Robotics segment rents out instrumentation equipment largely obtained from OEM suppliers. The Mechanical solutions segment rents out heavier mechanical equipment such as Winches majority of which is produced in-house. This segment also has a service element to it where engineers are sent with the rentals.

How does Ashtead create value for customers

Ashtead creates value for its customers by being a one stop shop for its large subsea engineering, procurement, construction and installation clients such as Deme, Saipem, Fugro, Boskalis, Subsea7. Speaking to a few of these customers at the 2024 Offshore Wind conference in Aberdeen, we found that customers care more about breadth of tools, reliability, availability rather than price. We also found from these conversations, that Ashtead scores very high relative to competitors on these important metrics because of scale and their strong customer service orientation.

A spread of a standard 20 pieces of rental equipment from Ashtead would cost a customer around £3,000 per day. On the other hand, the day rates for the offshore vessels used by Ashtead’s clients are £200k-£300k. If Ashtead’s equipment fails, work on the vessel likely stops and it will be extremely costly for the client. On the flip side, the daily rate for Ashtead’s rental equipment spread is very small compared to the overall cost of the project. This high materiality but low-cost characteristic of their product makes their customers value reliability and availability much more than price. This is a key insight.

Further, there is strong evidence that since the 2014-2016 oil price drop and corresponding crisis in the offshore O&G industry, there has been an increased propensity for Ashtead’s clients to rent equipment rather than buy. Ashtead allows clients to reduce capex and opex needs through cycle and hence be more capital light. In other words, over time Ashtead's customers are using more of their services.

Here is evidence of reduced Capex spend as a % of revenues by key Ashtead clients from 2013 - 2024. Below competitors are mostly publicly listed so numbers can easily be verified.

Source: CapitalIQ

And the same chart on a stacked basis (excluding Deme as data is only available for a shorter time frame):

Source: CapitalIQ

The trend is strikingly clear across the board. Also going through recent conference call transcripts of these customers, you find a reiteration by Ashtead’s customers to stay asset light. And why wouldn't they. Across the board Ashtead's customers are at record high margins and cash flow generation. If their customers are doing well, that bodes well for Ashtead for the long term and likely implies a continuation of the propensity to rent and use Ashtead's services.

Historical financials

While the business is cyclical, most readers may be surprised to see that Ashtead has maintained very healthy margins (15%-40%) through cycle for the last twenty years. The numbers can be verified through Companies House. Even in their toughest year in 2016, they were profitable and had double digit EBIT margins. Revenue and EBIT has compounded at 17% and 16% respectively for the last 20 years, and as mentioned earlier has accelerated through the implementation of an M&A strategy in 2017.

Source: Companies house and Ashtead Tech filings since listing

Market structure

According to Ashtead ~65-70% of the equipment is still owned by their customers rather than rented, so their biggest competitors are their own customers. However, as showcased earlier, there has been a long-term shift towards renting.  In Survey and Robotics globally, Ashtead has 50% market share. They recently acquired one of their big competitors, Seatronics from Acteon Group. Another 30% share is with Unique Maritime Group and STR. The remaining 20% is fragmented. So, the market is structured as an oligopoly with Ashtead the clear market leader in terms of scale and scope. The market in Mechanical solutions is more fragmented with many smaller players providing Ashtead with a long-term opportunity for consolidation.

Competitive advantage

The main source of Ashtead’s competitive advantage is from economies of scale and scope. This can be seen in two areas:

•           They have purchasing power relative to their smaller competitors. They get 15-20% volume purchasing discounts from their OEM suppliers.

•           Their scale results in higher cost utilization than their competitors.  Over time they can improve the utilization of their acquired acquisitions. Their ability to achieve this improvement result from a couple of factors:

o           Most businesses who Ashtead are competing with are local. Ashtead can internationalise businesses to increase cost utilisation (and optimise pricing to increase revenue utilisation i.e send assets to geographies that have the highest price for equipment)

o           Customers (and experts) have verified the benefit of convenience and the rationale of a one stop shop. i.e scale players should have higher cost utilisation.

o           Due to their scale, Ashtead has the best view into the supply and demand dynamics of the rental market. This allows them to maximise the rental yield (both pricing and utilisation) on the assets better than smaller competitors. Their survey and robotics head, Phil Middleton mentioned that this data advantage over peers was their biggest competitive advantage.

And we have evidence of this from their history. In the prospectus they mention: “Cost utilisation fell from 2018 to 2019 owing to the impact of acquisitions with lower levels of utilisation”.

Source: Ashtead financials and prospectus

Cost utilisation fell from 41% in 2018 to 35% in 2019 due to significant M&A. However, overtime Ashtead has been able to improve their cost utilisation gradually and today it stands at 44%. Their ability to improve the businesses they acquire is evidence of their advantaged position.

Additionally, this industry has not seen any meaningful new entrants for a long period of time. Based on our conversations with Subsea experts, the barriers to entry mainly stem from the technical and mission critical nature of the equipment Ashtead provides its customers. It's not enough to just have capital.

TAM

While their end markets are cyclical, there are structural drivers of growth for Ashtead.

•           There is an increased propensity to rent rather than own by Ashtead’s clients.

•           Ashtead’s leading position in Survey and Robotics, and positioning as a one stop shop has allowed it to gain market share from competitors organically. M&A has additionally added to their scale benefit.

•           Data from Rystad Energy research and Ashtead’s customer’s growing backlog give confidence that there is long term demand and Ashtead should experience double digit organic growth for the next few years.

Source: Ashtead Tech’s 1H 2024 presentation

Ashtead recently re-iterated its 2025 guidance which implies 30% EBITA growth in 2025. Consensus has a further 12% growth pencilled in for 2026. This is without any further M&A.

Importantly, we can keep abreast of their customers backlog as most of their big customers are public. And across the board, they are indicating healthy growth in their offshore backlog into 2026 and beyond.

Here are the recent 2024 numbers from their largest customers:

DEME: Offshore energy order book up 13.4%. Even while offshore revenues grew at a very fast pace of 36.8% for 2024.

Subsea7: Orderbook up 10.8%, while revenues grew at 13.3% for 2024.

DOF Subsea: Orderbook up 29%, while revenues grew 23% in 2024.

Fugro: Orderbook up 4.3%, while revenues grew 3.4% in 2024.

Saipem: Orderbook up 14.4%, while revenues grew 24% in 2024.

TechnipFMC: Subsea order book up 11%. while subsea revenues grew 19% in 2024.

Also, it is important to note that the order book / backlog is generally long dated. Roughly a third converts to revenue in a year, another third in 2 years and the remaining further out providing confidence that we can underwrite growth for the next few years. It is also worth noting that offshore wind projects are tied to the construction (early) phase, while oil and gas projects are tied to inspection, maintenance and repair of existing oilfields. Oil fields usually have a useful lifespan of 15-30 years which even though not truly recurring gives a sense of stability of demand for Ashtead's services over the long term. Further once oil fields get decommissioned, Ashtead's services and end of life equipment are needed again.

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Unit economics

The current payback on capex spend (1 / Revenue utilization) is just above one year. And on average their equipment lasts more than 10 years! (and depreciated faster, more on that later). Although the current market is tight i.e Ashtead has been able to push pricing and achieve quicker paybacks, over the last five years Ashtead has achieved an average payback on capex spend of 2 years, which still results in great economics.

Source: Ashtead’s filings

The above, along with M&A at 5-7x EBITA explains how they have achieved such strong growth in the last 7 years. Since 2017 they have cumulatively generated ~£150mn of operating cashflow of which ~£90mio has been deployed into Capex and ~£110m has gone into M&A (excluding the Seatronics acquisition). A re-investment rate of greater than 100% has been achieved with prudent use of leverage. EBITA has increased ~£50m in the period. The pre-tax and pre-interest ROIC of their spend is then 50 / (90+110) =25% and translates to an ROE (after interest, taxes and incorporating leverage) of >30%. Their recent numbers are buffeted by an improvement in margins. On a forward-looking basis, I estimate a post-tax ROE on both M&A spend (assuming 6x EBITA paid) and capex spend of 20%. This aligns with their long term 20-year track record of compounding at ~17%.

Management

CEO Alan Piere joined the firm in 2009 and has been CEO since 2012. Speaking to him you get the sense he knows the business inside out and is exceptional at running it. He owns 1.7% of the firm. Senior management is compensated on EPS, ROIC and share price performance. My main gripe is that they haven't instituted share buybacks at these depressed prices to take advantage of the dislocation.

Valuation

While accounting earnings would show that Ashtead is currently trading at 13.9x 2024 earnings (which is already very cheap for this track record), that simplistic analysis would miss a couple of key elements:

1) They depreciate their rental assets from between 7 years to 15 years but based on multiple conversations with management we found that most assets generate revenues well past the accounting depreciable life. This means that the actual depreciation (~£20m for FY24E) is much greater than maintenance capex (~£10m for FY24E) and true earnings power is much greater than accounting earnings.

2) Current numbers don’t account for the meaningful Seatronics acquisition completed in late 2024 that adds £9m of EBITA to the business (~20% addition to existing EBITA)

Taking into account the above 2 factors, you have a business at a £419m market cap and EV of £541m. On a run-rate basis the business is doing ~£78m in EBITDA. Maintenance capex is ~£10m. Interest costs including the additional interest expense due to Seatronics acquisition is £10m. EBITA (using maintenance capex) = £78m-£10m =£68m. Net income = £68m - £10m in interest cost * (1-25% tax rate) = £43.5m

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That translates to a FY24 EV/EBITDA of 6.9x, EV/EBITA of 8x and earnings multiple of 9.6x. Exceedingly cheap for a company that has compounded at 17% for 20 years, has recently increased the rate of value creation with its M&A strategy, is the most competitively advantaged player in its industry and has a strong near-term growth outlook. As alluded to in the thesis section, I expect a 35-40% CAGR with a five-year horizon, driven by double digit organic growth, M&A at 5-7x EBITA and multiple expansion.

I also find it quite surprising that Ashtead’s much larger customers are valued at higher multiples than Ashtead even though Ashtead has higher growth, much higher margins and looking at their long-term results, lower cyclicality and linkage to end markets.