Growing?

By Murray Pollok23 April 2008

In October 2007, the IRN financial benchmark numbers were first published. Six months later on, how is everyone doing? Most of the IRN 100 rental companies are performing well according to their most recently available numbers.

Revenue increased at just under an average 5% for the top 5, in their home currencies. For the largest rental companies, this mostly means the US$, GB£ and the Euro. This increase reflects growth in the use of rental of equipment, as well as some price increases in some sectors. The Coates/National merged company in Australia will enter the IRN top 10, and promises more growth than is expected amongst most of the European or North American companies. Other companies showing above average growth include Aggreko, which has grown by acquisition as well as organically.

EBITDA and profitability is up even more, over 13% for the top 5 for EBITDA and nearly 17% up on after tax profitability. Several reasons for this include that many rental companies are getting more efficient as time goes on, and are operating in relatively steady markets. Merger and acquisition activity among the largest companies, particularly in the US, has been quiet; the last excitement was around Cerberus and United. Ashtead Group is still digesting its takeover of NationsRent in the US.

Debt

The earnings reports for the top European and US rental companies this year nearly all emphasize that they have their debt under control, or are indeed reducing it. This is a result of operating efficiencies and limited capital expenditure. The message to the markets seems to be "don't worry, we have already battoned down the hatches and we are ready for any storm".

Capital & Equity

Among the top five rental companies, only RSC has raised significant amounts of capital on the stock exchanges in the last 18 months. This was to enable it spin itself out of Atlas Copco, the Swedish based equipment manufacturer. The company raised $255m in November 2006 on the New York Stock Exchange, which it used to pay down some of its debt.

Ashtead Group, owner of A-Plant in the UK and Sunbelt in the US, is doing the opposite, which is repurchasing its own stock, using mostly cashflow from its operations. The management logic of a share repurchase is that it if the company's shares are undervalued by market illogic (such as forecasts of a sharp downturn which may never come) then the remaining shareholders get an ever-increased portion of the increasing profits in the future. Worth keeping in mind is that RSC still has a shareholder's deficit (a negative capital account) even after the recapitalization of November 2006, while Ashtead Group is relatively much better capitalized.

United Rentals

United Rentals has reduced its workforce by 9% and cut other costs, resulting in an earnings improvement of 61%, which meant that in 2007 the company earned 9.7% (up from 8.3%) on sales of over $3.371 billion. $100m from Cerberus as a termination fee also helped, but underlying earnings were up as well.

EBITDA for United has increased to 31.4% for the year from just under 30% (in last year's article the EBITDA % number in the article had an error, apologies). The increased profitability is not reflected in its share price, however, which is still around 50% of where it was in autumn 2007 before Cerberus decided not to acquire....and before the credit crisis as well. The company is also paying down debt, by internal cash generated from operations, and it was already less-indebted than most of the top 10.

Caveats

Comparing numbers for companies mid-year is not always an exact science. Companies report numbers to their respective stock markets at different intervals, some quarterly, some every six months. Private companies and companies held by venture capitalists or other investors often do not release numbers to outside observers, so sometimes we must rely on estimates, or numbers from national company registries, usually annual.

Often rental companies are divisions of multinationals that share balance sheets and financial structures with larger organizations, such as Hertz and some of the Asian rental companies, so it can be difficult to separate some of the figures.

I have focussed on the top 5 members of the IRN 100 because they produce numbers quarterly, in detail, as they are quoted on the stock markets in New York and London. Mid year comparisons are more difficult for some of the rest of the top 10 and indeed of the top 100, which have many more companies owned by venture capitalists or other organizations who would rather keep their numbers to themselves.

Effect of currency changes

The top 5 rental companies have not seen their businesses shrink by over 10% - unless you compare them in Euros. The US$ has declined around 15% compared to the Euro since the IRN 100 Financials were published last year. In order to try to show ‘apples with apples' comparison columns show how the numbers would have compared at last year's exchange rate.

Although many of the largest rental companies have activity in the US, including of course the largest, United Rentals, in the near future we are likely to see continual important growth in other markets. Two examples of this are Coates/National Hire in Australia, which has reached its size by merger, and UK based Aggreko, which has activities growing in literally all corners of the world, as well as having acquired GE's generator business in December 2006.

If the US economy does slump, the we may not only see organic growth in other geographies, but also more international companies buying up US rental operations, such as Ashtead group did with Sunbelt years ago, then NationsRent more recently. The cheap dollar only makes this more likely in the short term.

Forecasts of doom and gloom aside, especially in the US, it's been a great year so far for the equipment rental industry. I predict continued profitability for most of the IRN 100 for the next six months, accompanied by careful control of cash and debt, and reduced capital expenditure. It may take a while longer, however, until we see share prices recover.

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