Description

Ashtead Technology Holdings Plc (AT.) has been growing its revenues >35% CAGR over the past 3 years, has a 21% ROIC, trades at a 2023 Ev/adj EBITDA of 12x (if we include in EBITDA: proforma figures of the acquisition of ACE winches, that is not reflected in reported earnings), or reported EV/EBITDA of 15.8x and has a long runway for future growth.

Since its IPO in 2021 AT is already a 4x multi-bagger, compounding its price at a 94% CAGR, yet it is cheap and still has a very long runway to continue its steady growth.

AT is a leading subsea equipment rental and solutions provider for the global offshore energy sector. It rents specialized equipment, used for site surveying, construction & installation, maintenance, life extension and decommissioning of offshore oil and gas platforms and wind farms.

The market for subsea equipment rental is highly fragmented with AT being the largest player. The market is consolidating and AT’s market share is growing both organically and from M&A. Clients also already own some equipment, but increasingly prefer to rent, rather than purchase new equipment.

Why would clients rent, rather than buy this equipment?

-          Large upfront purchase price. There are further costs with maintenance, repairs, storage, finally selling the equipment. AT buys larger quantities and gets a bulk discount. Service is cheaper because AT already has service personnel.

-          Some equipment also has to be operated by specialized personnel. This adds further complexity, lost time recruiting/training and costs. AT provides personnel and assistance, if required.

-          Availability. Equipment is often required ASAP (yesterday – if something is defective) and buying/delivering can take 12-18 months.

-          Flexibility in renting vs. owning. Customers can take on, only the cost of renting, when there is a need vs. having to own a piece of equipment even when it’s not being utilized.

-          Increasing customer backlogs are driving increased propensity to rent.

Offshore wind farms are an important part of the global response to the threat of climate change and to Europe’s energy security. There are stronger and more consistent wind speeds offshore and there is more physical space to add capacity, compared to onshore wind farms. An average onshore wind turbine produces around 2.5 to 3MW, in comparison to the offshore average of 3.6 MW. Onshore turbines are typically smaller than offshore, due to the difficulty of transporting long blades on twisting roads and the noise that large turbines produce (NIMBY, not in my back yard).

Offshore wind capacity has grown from 3.1 GW in 2010 to 64.3 GW in 2022 and is forecasted to grow at a 21% CAGR from 2024 to 2030. (Source: Rystad Energy Management Information).

2023 revenue breakdown: Up 51% from 2022 (35% organic growth + 17% growth from M&A - 1% from FX)

-          70% of FY23 revenues come from Oil & Gas. Rev grew 52% from FY22 and comes mostly from maintenance of existing projects.

-          30% of FY23 of revenues come from Offshore wind. Rev grew 50% from FY22 and comes mostly from construction of new projects.

Why does AT have a high ROIC?

-          AT is the dominant player in a fragmented, but consolidating market. This allows it to have the best margins and lowest costs.

-          85% of the rented equipment is fungible across oil, gas and wind. For example: equipment that was designed for the decommissioning of an oil platform can be used in the construction of an offshore wind farm.  This leads to lower required inventory costs and better utilization especially when demand for wind or oil/gas shifts.

-          Optimized inventory is key and leads to higher utilization.

-          The rented equipment, can/is shipped by sea or air freight anywhere it is needed on the planet. This leads to lower required inventories. AT has locations on all major continents, making shipping faster and cheaper. Customers usually pay for this shipping, unless AT does it proactively.

-          Equipment is depreciated after 7 years (or some after 15 years), but will still be rented and generate revenues after that.

Moats – Competitive advantages:

-          Scale. The company is able to get favorable pricing when sourcing equipment due to the larger volume of purchases and also benefits from better availability when supply is constrained. Scale also gives the opportunity to service bigger clients, especially those that require different types of equipment for large projects. It’s cheaper to service equipment, compared to a smaller company. More international locations lead to higher utilization.  Ability to provide customers a wider range of integrated products and complex services from a single supplier.

-          Specialized personnel and company culture.

-          Data. According to the company, the data that they have gathered so far, is their biggest competitive advantage. It allows them to optimize inventories, orders, locations, equipment utilization, expansion plans and M&A. Getting all that right, is the only way to achieve a high ROIC in the rental business.

Growth through M&A:

AT’s M&A deals have created tremendous value. In the past 5 years they completed 8 deals, at an average multiple of 5x EBITDA. All 7 deals were successful. AT looks for product and solution expansion, long term customer relationships and ability to grow service lines and regional capability. They focus on synergies and ROIC.

In 2022 they completed 2 acquisitions, at a multiple of 4.95x EBITDA, and so far, the combined revenue of these 2 units has grown 30%. These 2 deals added different types of equipment to their offering and lead to increased bundling packages, adding value to customers.

In Nov 2023 they acquired ACE Winches, a market leader in the design, assembly and rental of lifting, pulling and deployment solutions to the offshore energy industry, for 3.9x EBITDA, paying 53.5m £ (ACE Winches made 13.7m £ EBITDA in 2023 and has a rental fleet of >25m £ at original cost). This deal also added 200+ highly skilled employees. The equipment is sector agnostic (can be offered to offshore oil/gas/wind clients). AT said during the April 2024 earnings call, that ACE Winches is performing in line with their expectations. AT’s FY2023 EBITDA was 48.3 m £. If we include 12.6 m £ proforma EBITDA from this acquisition, EBITDA grows to 60.9 m £. This does not include any future value from synergies, better distribution or cross-selling. AT’s FY 2023 Proforma Ev/adj EBITDA drops to 12x, from a reported EV/EBITDA of 15.8x.     

Why will AT continue to grow FCF organically?

-          Huge industry tailwinds. Global offshore wind capacity (excluding China) is expected to grow at a 21% CAGR from 2024 to 2030 (most of these projects are already approved)

-          From 2020 to 2024 AT’s top 7 largest customer’s backlogs have doubled from 33 to 69bil $. Backlogs are also increasing in duration. These backlogs give greater visibility for future growth.

-          Industry consolidation and taking market share from mom & pops will continue to increase margins.

-          Right now, most of offshore wind revenue comes from new projects, under construction. These projects will generate future recurring revenues from maintenance.

-          AT plans to continue adding new products and expand into new adjacent niches and open new locations, to be closer to customers

Valuation:

There isn’t any publicly listed competitor. I will compare AT to construction rental companies: Ashtead Group plc (AHT) and United Rentals (URI). Since Jan 2005 both of these companies have created tremendous value for their long-term shareholders. They are up 70x and 38x respectively, even including the worst period possible - the GFC subprime mortgages crisis. These 2 were perennially undervalued during these 20 years, always trading around or below 10x EV/EBITDA. Mr. Market probably made an error here.

-          Ashtead Group plc (AHT):  9.3 EV/EBITDA, 13% ROIC, 24% avg last 3yr rev growth, 40bil $ EV

-          United Rentals, Inc. (URI):  13 EV/EBITDA, 16% ROIC, 19% avg last 3yr rev growth, 58bil $ EV

-          Ashtead Technology Holdings Plc (AT.): 12x proforma EV/EBITDA, 21% ROIC, 37% avg last 3yr rev growth, 730mil GBP EV

Ashtead Technology Holdings Plc (AT.) has higher ROIC and is growing faster. All 3 are cheap and all of them still have tailwinds and a long runway to keep growing.

AT’s enterprise value is <50 times smaller. When they do a 50mil $ bolt-on M&A deal, they add ~20% revenue, while also increasing ROIC and decreasing the EV/EBITDA multiple. For AHT and URI a 50mil $ M&A deal is basically a rounding error.  

Due to all the tailwinds, I expect AT to grow FCF at a >20% CAGR over the next 10 years, and I do not expect the multiple to contract over time, providing a >20% IRR.

Other considerations:

Net debt/EBITDA: 1.3x. (1.0x including proforma EBITDA) Company aims to be between 1-2x.

Guidance. The company has so far been conservative with their guidance. In 2021, 2022, 2023, 2024 they state: “Targeting industry/sector leading ROIC and low double digit organic revenue growth complemented by bolt-on M&A”. In the earnings calls they explain that the guidance is only for organic growth only, and that they don't give any guidance for growth from M&A. They have been growing revenues >35% CAGR over the past 3 years. One reason why the multiple is cheap, is that guidance is: low double digit revenue growth and 0% future growth from M&A.

Cyclicality. The company gets most of its oil/gas revenue from maintenance of current projects (maintenance needs to continue even in a recession). Offshore wind revenues come from construction of new projects, where clients have a large, long and rising backlog. This provides some visibility that earnings will be somewhat stable in the future, in case of a recession.

Risks:

-          The unexpected deployment of a new, cheap & disruptive onshore energy technology in a mass scale.

-          The unexpected increased severity of storms and hurricanes, beyond what wind turbines are designed to handle, could make wind energy obsolete.

-          Problems in hiring/keeping employees.

Catalyst

-          Higher FY 2024 earnings, due to synergies from the acquisition completed in Nov 2023

-          Continuing to grow organically, from customer backlogs and huge industry tailwinds in offshore wind

-          Improving margins from further consolidation and gaining share from mom & pops

-          Continuing to make bolt on acquisitions of high quality & growing companies, at a 5x EV/EBITDA multiple, and improving distribution of these new assets.