Ashtead Technology Share Discussion Threads

[bigbigdave] 23/4/2024 16:52

Very nice :o)

[solarno lopez] 23/4/2024 16:25

A nice end to the day

[wilmdav] 22/4/2024 22:59

Thanks, bertiebibingo

Just what was required.

[sogoesit] 22/4/2024 21:09

Excellent... thank you.

[bertiebingo] 22/4/2024 19:46

Morgan Stanley 44 pager on ROIChttps://www.linkedin.com/posts/kadir-tas-a1106a22_return-on-invested-capital-activity-7101540087573676032-tu8k?utm_source=combined_share_message&utm_medium=member_ios

[wilmdav] 22/4/2024 16:42

Sagoesit

According to Investopedia, the numerator is NOPAT (Net operating profit after tax), not NPAT (Net profit after tax).

My impression is that they include all equity in the denominator, together with net debt..

One of the other formulas does involve working capital.

I am going to have a good look at the subject over the next week or so and will report back on findings. Of particular interest to me will be how my other holdings/positions stand up in comparison to AT in terms of ROIC.

Thank you very much for your input.

[sogoesit] 22/4/2024 12:14

ROIC to get near management's figure:

= NPAT / (Debt - Cash + Equity)

= 21.579 / (69.673 - 10.824 + 3.997 + 14.115) = 28.04%

Should Retained Earnings be considered Equity and, if so, what other adjustments would be required (eg working capital etc.)?

[wilmdav] 22/4/2024 11:16

I thought it would be instructive to try to replicate AT's quoted ROIC ratio of 28.6% for 2023.

The numerator is normally straightforward (EBIT - tax).

Investopedia gives three alternative method's for calculating the denominator. These should all arrive at the same figure. My attempts to follow the instructions produce three different figures for 2023 between £168.6m and £159.3m and between £103.6m and £105.8m for 2022. Closer inspection and consideration will no doubt iron out the variations.

At present the only way I can get near an ROIC of 28.6% is to use AT'S 2023 adjusted EBIT (EVITA minus amortisation) minus tax for the numerator and my lowest figure for the 2022 denominator.

On this basis ROIC comes out at just above or below 28.6% depending on what tax figure is used (paid/charged).

I had expected the denominator utilised would be an average between that of 2022 and 2023, which would result in an ROIC in the region of 21.8%. It would be further reduced to around 18.8% if reported EBIT minus tax is used for the numerator.

Obviously the crucial thing in comparing one company's ROIC with another is to be consistent in one's own calculations.

Edited at 11:36am

[solarno lopez] 22/4/2024 08:10

I agree it’s under valued

[sogoesit] 22/4/2024 07:56

Where some investors see overvaluation ("not exhibiting good valuation metrics") other investors (Growth/Trend valuers) would likely see current undervaluation thus creating arbitrage at the current post-2023 Results "settled price" of 740p.

In, and from, a price action Trend price can only move three ways giving each a probability of 33-1/3rd%. Betting favours 66-2/3rd% outwith the Equity Premium.

Speculative Sentiment, and short term macro-economic uncertainty, will also create opportunity to both upside and downside mispricing, as recently demonstrated.

On a one year Term View the stock is undervalued... significantly imo.

[carcosa] 21/4/2024 15:02

Return on Invested Capital (ROIC) and Return on Capital Employed (ROCE) are key profitability metrics. While the numerators in their formulas are identical, the denominators differ - ROIC utilises invested capital, whereas ROCE is calculated using capital employed (adjusted for goodwill in my example).

These ratios indicate a highly profitable company, though they do not inherently suggest whether the company is under or overvalued. To assess valuation, one must apply relevant valuation metrics. Considerations include the price-to-earnings (P/E) ratio, the PEG ratio (as per Sogoesit psots) which accounts for growth, and the EV/EBITDA multiple frequently referenced for high-growth companies. The debt-adjusted P/E ratio also offers valuable insights.

Overall the company is not exhibiting good valuation metrics nor low gross gearing so I would not be surprised to see share price weakness over the coming months.

When evaluating an investment opportunity, I prioritise several key factors:

- The overall market growth trajectory - Affirmative for Ashtead Tech's sector.
- Pricing power? - Evident from high gross margins and recent 13% price increase.
- Ability to fund further acquisitions through organic cash flow or equity financing if required - Appears viable given their position.
- High revenue rate increases over next 1-3 years? - Easily Yes for next year.

So as long term investor I'm happy to hold but I would be unlikely to be a new buyer of the shares; even as (improved) analysts' forecasts start to trickle through.

[solarno lopez] 21/4/2024 12:24

So Carciso firstly thank you for your incisive posting

What conclusion did you draw from the piece, are we buyers, sellers or holders ?

[sogoesit] 21/4/2024 11:44

Wilmdav...
"It is not difficult to find shares in a strong growth trend but I currently feel underequipped to make an independent assessment of such a share's future growth prospects and the extent to which a share price or P/E is justified."

True (there are many companies that do exhibit strong growth trends, especially at present).
However, the ROIC measure, for me and others, exhibits the strength of management's (historic) performance using in part OUR capital and the leveraging of Debt (WACC).
This performance is based on financial and operating skills and judgement of (future) valuation when engaging in M&A and the impact of M&A synergies with its existing business.
If Returns are consistent over (historic) time then the probabilities are in favour of that management's performance being consistent in future. Of course the future is unpredictable and management may err or slip-up but investing is a game of probability and not of deterministic certainty. In general one's investing chances of good returns accrue from good management and this is exemplified by companies that have them (eg Steve Jobs/Jony Ive, Tim Cook, Nooyi, Bezos, Wolfson etc.).
ROIC measures how well management uses our capital in a domain of risk and return (cf WACC) where we as investors can quickly see the competitive use of our capital and choose to remain or go elsewhere (based on our own cost-of-capital).

Always seek and buy good management imv (and spot it with ROIC performance).
Here are some high ROIC performers: Inditex (20%+), HSY (20%+), LLY (20%+), MSFT (25%+), PEP (18%), LVMH (14%), Hermes (Paris) (24%), Frasers (12%+), Next (20%+), MPC, AMR etc.

P/E is another issue. It is one of valuation of present/past value against market participants' future growth expectations and can be both fickle and volatile. Investors, especially "Value" investors, can get easily confused when judging companies by P/E, especially when looking at historic (TTM) ratios and fall into the trap of not looking at forward valuations. The problem is exacerbated in the UK due to the infrequency of financial reporting (half-yearly, and late, versus US quarterly).

The PEG Ratio is therefore the best measure for this imv and the inventor, Jim Slater, wrote about it in The Zulu Principle. His son, Mark Slater, applies the principles in a Fund he manages, The Slater Growth Fund. This fund offers insights to growth company valuation and investing.
(NB. Growth company investing should not be confused with Momentum (Trend) investing albeit that when they combine returns do significantly outperform in my experience).

[baksun] 21/4/2024 08:45

An insightful analysis carcosa. Thank you. Certainly a significant difference between ROCE of 20.6 and ROOCE of 40.2 that indicates much about the company's potential for future profitability.

[carcosa] 21/4/2024 06:01

It can be useful to apply ROCE in a slightly different way when a company has been acquisitive and generated a lot of goodwill along the way.

Goodwill is part of capital employed and is included in the ROCE. When a company buys another company it often pays more for its assets than the value on the balance sheet. The amount of money above the balance sheet value is known as goodwill.

The standard ROCE calculation can sometimes mask the profitability of a company’s operating assets.

Calculating ROCE by excluding goodwill from the capital employed gives the return on operating capital or ROOCE.

Total Capital Employed is 179.5m and goodwill was 77.7m, so goodwill accounts for a 43% of Ashtead's total capital employed

If we ignore goodwill, we can see that Ashtead has very very profitable operating assets earning higher returns than given by the ROCE number.

This insight is important as it gives an understanding of the kind of profits that could be made from further investment in the business.

ROCE of 20.6 now becomes a ROOCE of 40.2. Investing more money into the business with a high ROOCE will drive higher future profits growth and this could be underestimated if you just rely on an ROCE calculation which includes goodwill.

The only distracting feature is that as ROCE and ROOCE are quite far apart it implies that Ashtead may have possibly paid too much when buying some of the assets but given ROCE is still very respectable am not all that concerned.

TLDR: Operationally the company is far more profitable than it initially appears.

NB: All figures taken from Sharepad.

[wilmdav] 20/4/2024 12:47

Sagoesit

Many thanks for such a clear and informative post, which has reinforced my impression that an understanding of ROIC is well worth pursuing.

Your Investopedia referral also contains a link to WACC (Weighted average of cost of capital), to which ROIC is compared.

The InvestorMeet website has a recording of yesterday's presentation. The company's ROIC target of high teens (28% in 2023), compared to WACC of 8% speaks volumes.

It is not difficult to find shares in a strong growth trend but I currently feel underequipped to make an independent assessment of such a share's future growth prospects and the extent to which a share price or P/E is justified.

[pb014] 20/4/2024 11:14

My accountancy philosophy is that of Oskar Schindler.Did we make more money than last year.Will we make more money next year.Simple.

[sogoesit] 19/4/2024 21:51

Yes, there are many metrics, and definitions, around and their meanings need to be "dug into" to understand them and what they say about the business's performance.

Anything to do with cash, albeit important, is more to do with profitability and thus not necessarily the same as profit returns on the investment to make the business run and deliver an overall return (capital efficiency).

ROIC definition is fairly "simple" in my view. It is the overall return of the enterprise, all warts and benefits included, divided by the investment applied in the business. So the numerator is Net Profit After Tax (NPAT).
The aim of measuring this is to determine how much in excess of the business's applied WACC is attained, capital allocation efficiency wise, and therefore how robust this is compared to market, sector or competitor's returns. High ROIC companies compound well in excess of competitor companies and therefore are good long term growth investments.

Arriving at the denominator is not always clear but it too simply comprises the applied capital in the business of which there are only two kinds, Debt + Equity. It is the (externally) sourced money that has gone into the business and its re-invested (internal) retained money. Both Equity and Debt are stated in the Balance Sheet. Cash sitting doing nothing should be deducted.

Stockopaedia states, for the denominator:
"Another method of calculating invested capital is to add the book value of a company's equity to the book value of its debt and then subtract non-operating assets, including cash and cash equivalents, marketable securities, and assets of discontinued operations."

ROIC's cousin, to my mind, in DCF modelling is Capital Intensity.

[wilmdav] 19/4/2024 15:16

Sharepad has updated its data for AT. today. Below is a link to an exercise I do for every stock of interest to me, although I don't normally put them online these days.



Use the dropdown menu to get into Ashtead Technology.

Click on the Excel tabs at bottom of screen to view the bar charts. Plenty of valuable comment to bear in mind about basic and adjusted metrics have been provided by others above.

I have never got to grips with ROIC (Return on invested capital). This looks like something worth spending time on. Sharepad and presumably Sharescope focus on ROCE (Return on capital employed) and CROCI (Cash return on capital invested). The latter is probably closer to ROIC. Here is the Sharepad definition:

"Cash Return On Capital Invested is Free cash flow to the firm (FCFf) as a percent of average Capital employed over the year, where FCFf is the cash after tax and capex have been deducted. Capital employed is calculated as Total assets minus Current liabilities plus short-term borrowing."

[sogoesit] 19/4/2024 12:29

Also my take on "InvestorMeet"

From question responses:-
ROIC > "high teens" target is good (Warren Buffett looks for 18%+ threshold)

Mechanicals sector is "highly fragmented" > Long M&A runway here

Capex budget for equipment this year to be around £30m

Financing costs to be around £6m (a 50% on FY2023)

M&A looks to be "core" strategy in fragmented Mechanicals market thus expect "Exceptionals" to be constant or highly variable, not exceptional

Potential for Services Revenue growth due to skills shortages amongst Operators (Technip, Sub-sea7 etc.)

Did not catch the "small hint of cash raise". Acquisitions to date having been highly cash generative this would tend to favour debt in my view ... especially if acquisitions are accretive at > 20% ROIC and given WACC answer given.

My expectation is that there is manageable Revenue Growth opportunity of CAGR 50% going forward and therefore shares are currently undervalued based on forward PER less than 35.

[chester9] 19/4/2024 12:21

No mergers confirmed as being close but consolidation of fragmented suppliers agenda continues..Small hint of a cash raise may be required to fund this route..Markets predicted strong growth in next few years. .Solid update with reminder of share price from 1.62 to todays price being a good return since 21.

[sogoesit] 19/4/2024 09:51

Cheers, Villa! ;-)
Yep, W7L looks a good one, agreed.

PS. 11.30am today for AT's InvestorMeet and hope to learn more on M&A going forward as it will be at least +50% on revenue in Pro-Forma 2024.
Bought more today as the share price is below my forward TP.

[slogsweep] 19/4/2024 07:58

CFO sold 82k shares to cover income tax on LTIP options, that might explain dip on Tuesday