Ashtead Technology: the recent selloff has provided an opportunity to add to my position.

I’ve just added to my position in Ashtead Technology which looked particularly attractive after the recent poor share price performance.

Ashtead is a subsea equipment rental provider which serves the offshore oil & gas and renewables sector. Its performance recently has been really strong, with FY24 revenue growth of 52% (including the recent Seatronics and J2 Subsea acquisitions) and organic growth of 14%. Margins have slipped slightly but remain well within the guidance set by management at the start of the previous financial year.

Th business also has really strong returns on capital. I have the most recent FY24 figure at 16.6% and 37.8% excluding the effects of goodwill and acquired intangibles measured at cost. The company measures this slightly differently and has this at 24.3%. Either way these are really strong numbers for a company that is still busy acquiring other businesses.

As touched on above the business grows through a mixture of acquisitions and organic growth. It reports that there is a good amount of headroom in both areas. A fragmented competitive landscape creates a good number of potential acquisition candidates with ample opportunity to add value through cost savings and cross-selling opportunities. On the organic growth side, the market is forecast to grow 9% CAGR until 2028. Even if Ashtead is only able to maintain share, this would still be a good performance.

It’s never possible to know the exact reasons why the share price has fallen in recent months, but there are a few possible explanations. Firstly, Trump is actively opposed to offshore wind and has recently ordered for construction on a major New York wind farm to stop. This may have spooked some investors but given offshore US wind makes up under 3% of the company’s revenue, I don’t see this as a significant issue.

On the flip side, the UK government is opposed to offshore oil and gas, which makes up around 10% of the group’s revenues. Whilst this is not insignificant, Ashtead also rents equipment essential to the decommissioning of offshore oil & gas, so it has a somewhat hedged position in this scenario.

The final reason is that capital flowing to new offshore projects could slow in the context of the wider macroeconomic slowdown. This is a possible scenario, but given the current level of backlogs Ashtead’s customers already have and the importance of transitioning to newer, more sustainable sources of energy, I think the downside in this scenario is cushioned.

For these reasons I think the recent selloff has been somewhat overdone.

My one concern with the business is the rising levels of trade receivables. The company doesn’t provide commentary on this line item in particular but does suggest that this is caused by a revenue timing issue. Something to keep an eye on for the time being.

I have just re-valued the business with very conservative assumptions and come out with an estimate of £5.20 - £5.80 per share. I think there is the potential for 80-100% upside if we continue to see double digit organic revenue growth and healthy margins in the short to medium term.

I also realise that I haven’t yet published by full investment case on Ashtead Technology, but I will do so in the not too distant future.