Leading subsea rentals and services group Ashtead Technology (AT.:566p) has upgraded earnings guidance again and announced an earnings accretive acquisition, too.

The independent company supports the installation, inspection, maintenance and repair (IMR), and infrastructure decommissioning across the offshore energy industry. Increased activity offshore and the emergence of the energy trilemma, a three-way push-pull of energy security, affordability and sustainability, continue to play to Ashtead’s strengths.

Such is the momentum in the business that having pushed through a 9 per cent earnings per share (EPS) upgrade at the interim results in September 2023, house broker Numis Securities has raised its 2023 forecasts by more than 3 per cent to 29.2p, implying 50 per cent year-on-year growth. Moreover, with the benefit of a strong balance sheet, the group is tapping its revolving bank facility to make the smart acquisition of ACE Winches, a market leader in the design, assembly and rental of lifting, pulling and deployment solutions.

The company’s equipment rental fleet is one of the most comprehensive of backdeck machinery in the industry and is highly complementary to Ashtead’s existing portfolio. Furthermore, ACE Winches generates almost 80 per cent of its revenue outside of the UK, so it offers scope for Ashtead to expand its global offering across its existing international footprint. Also, the acquired business is predominantly focused on the oil and gas industry, so Ashtead has an opportunity to redeploy its asset base in offshore renewable markets.

Sensibly priced strategic acquisition

• Trading ahead of earnings expectations
• £53.5mn acquisition of ACE Winches
• Massive EPS upgrades to 2024 forecasts
• Share price surges 17 per cent to record high

Importantly, the acquisition is sensibly priced. For the 2023 financial year, ACE Winches is forecast to generate underlying cash and operating profit of £13.7mn and £10mn, respectively, on revenue of £43.4mn, implying Ashtead is paying a multiple of 3.9 times cash profit. It is the group’s eighth acquisition in the last six years.

Factoring in the cash consideration of £53.5mn, Ashtead will close the year with net debt of £76.9mn, or 1.25 times proforma cash profit of the enlarged group. The debt ratio could fall to 0.9 times cash profit, of £64.8mn, within 12 months as forecast free cash flow of £17.2mn deleverages the balance sheet.

Moreover, because the acquisition is being entirely debt funded, shareholders are reaping the lion’s share of the incremental profit generated from ACE Winches, hence why Numis raised its 2024 pre-tax profit and EPS estimates by more than a quarter to £39.7mn and 36.6p, respectively. On this basis, the shares are rated on a forward price/earnings (PE) ratio of 15.5, and on 11.4 times operating profit and 8.1 times cash profit estimates to enterprise valuation. From my lens, Numis’ forecasts look conservative, so a continuation of the upgrade cycle looks firmly on the cards.

So, having initiated coverage on the shares at 257p (‘Alpha Research: Profit from the great energy reset’, 9 September 2022), and last reiterated that buy call at 408p (‘Another upgrade, another reason to buy Ashtead’, 8 September 2023), I am raising my fair value target price to 650p (from 475p), slightly above Numis’ raised target of 615p. Buy.

■ Simon Thompson’s latest book Successful Stock Picking Strategies and his previous book Stock Picking for Profit can be purchased online at www.ypdbooks.com at £16.95 each plus P&P of £4.95, or £25 plus P&P of £5.75 for both books.