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Bottom Line: Doing the right thing

Tuesday 02 November 1993 19:02 EST
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WHEN the market greets a rights issue that almost doubles a company's capital base with a rise in the share price, it approves. This was the case yesterday with Ashtead Group, the plant hire company, where the announcement of a pounds 20.4m rights issue sparked a 1p rise to 324p in the shares.

The purpose of the fund-raising is not to do anything new, but to finance the company's next stage of growth in its existing businesses both organically and by a series of small acquisitions.

Bearing in mind Ashtead's respectable record through a recession that has been notoriously cruel to its traditional customers - the construction industry - shareholders will be very happy with more of the same. True, earnings per share were considerably lower in 1993 than they were in 1990, but they were up on 1992. Meanwhile, turnover, which is very important for a fixed-cost business, has risen slightly.

Ashtead has achieved this by diversifying away from the UK construction business towards utilities and local authorities and abroad. And it has resisted the temptation to cut back on capital spending. Now, as the business climate starts to improve, price rises in the core UK plant hire business are beginning to stick. At the same time, a new realism is emerging among sellers of plant hire businesses about the prices they can expect.

This gives Ashtead a window of opportunity to expand by acquisition. Bolting on extra plant hire sites should raise costs only slightly while boosting turnover significantly. Shareholders should take up the rights.

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