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US recovery will cancel debt worries at Ashtead


Plant hire giant Ashtead believes that the industry is unnecessarily obsessed with its £490 million debt.

Its chief executive George Burnett tells Steve Menary why it needs to be judged as a unique case

ARREARS of half a billion pounds could well be described as a debt mountain but Ashtead chief executive George Burnett is having none of it.

Armed with a stock market presentation, he wants to explain exactly why owing £490.8 million at the last count is not a barrier to running a successful plant firm.

'You've got to look at the nature of our business, ' he says.

'We're not like a manufacturer with a fixed plant base like a factory.And we're also in a position where the United States market is starting to pick up.'

The USA provides two thirds of Ashtead's turnover and is vital to the firm's debts, a continued improvement in trading and perhaps resolving those arrears.

Ashtead had two depots in the USA in 1990, but had expanded to 90 in several parts of the country by 2000 when Rentokil decided to offload its plant operation, BET. Buying BET brought a further 60 depots and helped make Ashtead into the fourth-largest plant hirer in the USA based on income.

The deal also cost Ashtead a thundering £340 million, which is still sandbagging the firm's balance sheet.

Mr Burnett says: 'Some say it was a bad deal but it took us into fourth place in the States.

'The problem was the form of the funding and the downturn in the US market at the time.

'With the benefit of hindsight, we'd have been better doing some sort of rights issue.'

The US market has since recovered and has benefited Ashtead. Plant hirers in the USA supply just 20 to 25 per cent of construction equipment - the reverse of the UK - but this situation is changing rapidly in favour of the hirers.This is one of the main reasons why Ashtead's shares have quadrupled in value over the past year.

Another is a more stable financial situation.

Last November, Ashtead converted the biggest black hole on its balance sheet into a new debt of £350 million, which does not have to be cleared for five years.

As evidence of the City's faith in Ashtead's long-term future, Mr Burnett points out that this refinancing was twice oversubscribed by the banks.

So far, Ashtead has only used £241 million of that debt facility and there are no conditions to the debt provided that at least £50 million of the £350 million available remains unused.

'That is a significant change in banking attitudes, ' says Mr Burnett.

To finance the BET deal, Ashtead also took out a loan of £134 million with Rentokil itself. Interest is 5.25 per cent and the loan is not due to be repaid until 2008, when Ashtead could repay this debt with another bond or loan.Ashtead also has another £120 million bond with an interest rate of 12 per cent but this is not repayable until 2014.

With profits rising and Ashtead covering all these payments, Ashtead is clearly able to continue trading successfully - hence the share price surge.

Yet will Ashtead ever repay these debts or will they hang over the business forever?

Mr Burnett insists that repaying debts is not necessary in the short term.He says that the banks look at the ratio between debts and earnings before tax and depreciation - known as Ebitda - and this has dropped from 3.9 per cent to 3.1 per cent.

Mr Burnett adds: 'We were never in danger of not being able to repay our interest charges. If the group is earning more and the balance sheet is healthier, then you're obviously in a better position.'

Perhaps more importantly - if anything can be more important to a company with a market capitalisation of around £330 million and a half a billion pounds of debt - is financing the US growth.

In recent years as financial pressures have grown, Ashtead cut outlay by not replacing its fleet, particularly in the USA. Ebitda profits hit £125.9 million in the nine months to January 2005 from £112 million in the same period a year ago.

With spending on new kit only rising slightly, this is how Ashtead has paid off £50 million of its debts. But to underpin growth in the USA the firm has to invest.

Mr Burnett explains: 'We said at the start of this financial year that we expect to spend £100 million on our fleet.This year, because we have been trading well and the results have been good, we expect to spend between £120 million and £130 million.Given favourable conditions, we would expect that figure to increase.

'The percentage of kit requiring repair is in low single figures and we have cleared out a lot of the older equipment.'

Mr Burnett puts this down to buying from big names such as JCB and Ingersoll-Rand.

He also highlights rising income from selling old kit with £25.4 million recouped in the nine months to January 2005 - up from £17.2 million a year ago.'We get between 30p and 40p back on every pound we spent on equipment, ' says Mr Burnett.

With the US market growing in favour of hirers, investors are getting more positive about Ashtead's shares despite some analysts expecting a rights issue.

Issuing more shares to raise cash would help the firm's financial position but dilute the value of existing stock.

Alex High, an analyst at Cazenove, Ashtead's house broker, points to the firm's sky-high gearing of 350 per cent.He says: 'The business does generate free cashflow but we expect the majority of this to be used to fund growth capital expenditure during the cyclical upturn.

'The remaining free cashflow is unlikely to cause much of an impression on the group's net debt position.We believe this is most likely to be done through a rights issue.'

Cash raised from a rights issue could be used to pay off the Rentokil debt but Mr Burnett insists this is does not have to be the case, although he does not dismiss the idea.

'People have focused on the debt like it's an imposition on the business but we now have the flexibility from the banks to go forward, ' he says.