Ashtead falls after Merrill Lynch cuts target price on yield pressure

13th Aug 2015 16:29

(ShareCast News) - Ashtead shares were dragged lower as Bank of America Merrill Lynch winched down its target price for the equipment rental company to 820p from 1,000p and reiterated its 'underperform' rating.Ahead of the FTSE 250 company's first quarter results on 2 September, Merrill expressed concern about rate pressure from economic data and negative read-across from peers.Data from industry information specialist Rouse reported another move down in its orderly liquidation valuation (OLV) 'appraisal' data, implying negative pressure on yield growth, coming after negative comments from a number of peers in the US.On the peer group comments, Merrill pointed out that recent weeks have seen results and comments from a number of peers in the US that point to weakening trends and lower full year guidance."In particular, United Rentals spoke at a conference on Tuesday and spent most of the meeting discussing weaker market trends and what action it might take to offset headwinds if pressure, particularly from weak oil and gas markets, continued. This included 'repurposing' additional circa $60-70m of oil and gas equipment."Merrill also has been tracking Rouse's OLVs data, which has been a lead indicator of the direction of rental rates and in June recorded a seventh sequential monthly decline.On an EV/EBITDA ratio of 5.7 times, Ashtead is at a premium to its historical ratio of around 5.0 and to the recently derated United Rentals ratio of 4.6 times.The target price was cut after margin targets were lowered to 42.5% from 45%, "which we believe is closer to a mid cycle margin, compared to 32% in the last cycle".