Stocks in Spotlight: The Role of Ashtead Group in the Circular Economy Investment Landscape

A Business Model Propelling Circularity

Ashtead’s core business involves renting out equipment, a practice that inherently supports the circular economy transition by reducing the resource-intensive production of new equipment.

The company operates General Tool and Speciality Products business segments. The General Tool segment focuses on a broad range of equipment primarily used in construction and industrial applications. On the other hand, Speciality is aimed at products with lower rental penetration in predominantly non-construction markets such as Power and HVAC, Climate Control, Air Quality and Pump Solutions. This segment has played an important role in enhancing margins – in the 2023 financial year, Speciality revenue accounted for nearly 30% of the business and grew at a faster rate than General Tools.¹ The potential for significant growth remains given the low penetration of rental equipment. Brendan Horgan CEO, pointed out during an earnings call: “When you see a power generator, a standby generator bolted to a piece of concrete outside of a building, that is putting out emissions every single week just exercising itself, it’s always owned. So the opportunity there is massive. It’s super low rental penetration.” ²

Ashtead Has Successfully Capitalised on Growth Initiatives

Through strategic acquisitions and the establishment of new greenfield locations, Ashtead has significantly expanded its reach and efficiency. Over the past six years it has acquired 138 companies and is now the second largest equipment rental company in North America.³ It also serves UK customers and is listed on the FTSE 100 index.

Ashtead has no plans to end its significant momentum. Under its strategic Sunbelt 3.0 initiative, the company is looking to add 298 greenfield locations across North America by clustering its top markets in the U.S.⁴ These include a broad range of equipment for various applications, including construction, industrial, and general equipment. Clustering allows for a more extensive range of products and services by grouping together both large and small rental locations. If successful, this will enhance its competitive edge, boost margins and create synergies among the newly grouped locations, thereby boosting returns on investment.

Financial Performance & Market Positioning

Ashtead has demonstrated strong financial growth, with a Compound Annual Growth Rate (“CAGR”) of 16.25% in revenue between 2013 and 2023.⁵ Even more impressive is the growth in operating income and net profit, showcasing the company’s ability to scale effectively and leverage its business model for increased profitability.

There are two key drivers of structural growth in this industry. One is customers choosing to rent more equipment which increases rental penetration. The other is the big getting bigger, which increases market share. Ashtead has seized both these opportunities, enjoying significant growth over the past decade because it has prioritised investment in its quality fleet and has had the financial strength to do so. It has invested in a broad range of fleet and complimented this with excellent service leading to customer loyalty.  It has also diversified into speciality markets such as theme parks, live events, and TV production. This has not only broadened its revenue base helped insulate the company against economic downturns.