What’s happening in the sector right now?
Like most, the UK equipment rental sector has been punished by the stock-market – the average quoted share price is down 31% since Covid-19, and no company has remained unscathed.
However, this fall is only about the same as that of the FTSE100 – reflecting the view that construction as a whole is seen as essential, and suppliers into it should theoretically be well positioned both now and in the future. As Ashtead said in their recent announcement: “We’re identified as an essential service provider, critical to making sure that the UK infrastructure stays operational during the national response to Covid-19. It’s our job to support the people who make sure the lights stay on and keep the wheels turning.”
It is because large parts of construction are seen as essential, that current trading in the sector has held up relatively well. However, it is clear that pockets of the market are faring significantly better than others, and there are some serious operational consequences flowing from the lockdown around access to sites, supply chain and social distancing.
Looking forward, there will be some big winners coming out of the crisis, however expect things to get worse before they get better. Struggling rental companies rarely die quickly and instead cause market disruption. In an environment with reduced demand, and companies desperate for cash, we expect to see pressure on rates and utilisation in the next 12 to 18 months.
However, as old fleet comes out of the market, and is not replaced as balance sheets are constrained, the healthy, focused and specialist operators should see really strong performance from 2021 onwards.
On the M&A front, we expect to see some distressed mergers or acquisitions, and some fire sales of non-core fleet, but it’s likely that most of the big or strategic acquisitions will be put on hold. There’s been a lot of high profile deals across the UK and the rest of Europe in recent years, and these need to be digested. There is unlikely to be a consolidator of scale with a strong enough balance sheet to continue acquisition led expansion.
Be nimble, be patient – but most of all be well capitalised – and there is an exciting future ahead. In the short-term, it’s all about having the right end-markets, the right fleet, and perhaps most importantly, the right balance sheet.
DC Advisory’s UK equipment rental experts explore >
Operational impact of Covid-19
The key issues seem to be:
- Keeping depots open: Of the quoted companies, Speedy and HSS have both announced closures of their ‘retail’ estate. Many others are keeping their depots open, but with a skeleton staff. The furlough scheme has really helped, but it cannot go on forever
- Supply chain disruptions: The availability of key raw materials, such as cement, is stretched and this is flowing through into ability to carry out projects. The varying approaches of the builders’ merchants to stay open is also having a knock on effect, particularly for smaller operators, and this has consequences on demand for rental kit
- Safeguarding of employees: Establishing new ways of working to allow for social distancing is occupying people’s minds, having some positive effects on the sector. For instance, providers of welfare units and vans are faring well as site managers look to keep sites going whilst still observing social distancing
- Legal contracts: The contractual consequence of failing to finish projects on time is likely to provide an impetus to getting sites working again. Contract lawyers in general have become busy with a potential for significant future workflow across all sectors as detailed contractual terms are being scrutinised very carefully. Force Majeure is now a much talked about term
- Fleet insurance: For kit that is left mothballed but not returned, who is bearing the cost of insurance, and what extra security measures are required?
- Physical space for off-hire. Most businesses are not geared up for storing large parts of their fleet, posing logistical challenges for operators rightly assuming that a large portion will be on-hire at any given time
- Fears over debtor book: Working capital is stretched, as all parts of the supply chain seek to accelerate receipts and defer payments. A close working relationship and dialogue with customers and suppliers is essential
- Lenders and liquidity: Large parts of the market are in breach of covenants. Lenders are currently behaving pragmatically, while they have little choice as balance sheets are stretched, and the current resale market is very weak. For anyone with a valuation due, it is worth exploring deferring this – valuations in the current environment will have a material impact on ABL facilities. Lenders are struggling with the implementation of the Government’s CBILS scheme, and it’s proving very difficult for companies to access. This may change, but don’t rely on it as a source of short-term liquidity.
Establishing new ways of working to allow for social distancing is occupying people’s minds, having some positive effects on the sector
With those operational issues aside, what are the ‘right’ end-markets for UK equipment rental now?
Infrastructure – businesses with a bias for key infrastructure such as rail, civils and essential maintenance, are holding up very well on the demand side. In the medium term, this resilience should flow through into attractive valuations for sellers as resilient businesses that can grow through this cycle will attract a premium in the future.
Housebuilding – a much tougher environment, short and medium term. Most major house-builders have mothballed projects, and lenders have withdrawn mortgages. Although the structural undersupply of housing persists, the biggest impact is likely to be from medium term weakening of consumer confidence and its knock-on effect on volume of transactions. Builders will not build into a weak demand market.
Commercial – likely to be extremely tough for the foreseeable future as the economy struggles to come back to life. Already, the massive increase in remote working is likely to spill over into the medium term for office accommodation, and with supply already considerable in the speculative boom of the last few years, this market will face a tough time.
Small projects – all things DIY related are performing strongly in the current lockdown, as people use the time and enforced stay at home to work on their properties. For the retail end of the market we expect this trend to continue in the medium term.
It is because large parts of construction are seen as essential, that current trading in the sector has held up relatively well. However, it is clear that pockets of the market are faring significantly better than others
The importance of the right fleet
The next few years will be a tough time to invest in fleet, so we’ll slowly begin to see difficulties for those companies that have not kept a well-invested fleet during the good times.
Asset finance lenders will tighten their reins, and we should really start to see the impact of HMRC’s preferred creditors status flowing through in availability of finance. Companies without the cash flow to fill the equity part of any capex purchase will slowly see their fleet start to reduce, and risk entering a negative spiral – just like in 2008 – 2011.
The importance of the right balance sheet
Probably most important of all. There’ll be pressure on rates as the market has a temporary oversupply of most kit. Companies desperate for cash in a demand constrained environment will seek to put their fleet out, sometimes not far above cost, just to generate some cash-flow. This is likely to bring down rates across the industry.
The good news is that in a non-expansionary environment, equipment rental companies can generate a lot of cash in the short term if they are not investing in maintaining or growing their fleet size. The bad news is that this can’t go on for too long – it’s a sector where you invest, or die
There will be pressure on resale values for used equipment as demand drops off somewhat. There will also be pressure on debt facilities. Not only will lenders likely seek to reduce their exposure over time, both the quantity and terms of any subsequent lending are likely to tighten.
Cash is king in this environment. Those who have entered this crisis with highly geared balance sheets will almost certainly struggle.
Equipment Rental Services experts:
Managing Director, DC UK
T: +44 (0) 16 1362 6789
Executive Director, DC UK
T: +44 16 1362 6795