6 factors affecting Sunbelt Rentals’ growth this year

Last week we reported profits were down from expectations for Ashtead Group, parent company to US-based Sunbelt Rentals, which saw its total revenue jump 13.2% over the past year. 

To take a deeper dive into Sunbelt Rentals’ success, we studied the annual report and found six key factors among insights into its financial health, strategic initiatives, and market dynamics. 

Let’s take a look at what Ashtead says will affect Sunbelt Rentals this year:

1. Growth in non-residential and non-building components of construction end market

In Ashtead’s annual report, it was stated that non-residential and non-building components of the construction end market are proving to be incredibly strong and forecasts show that continuing. A non-residential slowdown in the pandemic was softened by strength in residential construction, but this has bounced back, causing a strong uptick in starts in 2022/23.

This is not a residential uptick, as experienced in 2020/21, but the early wave of new project starts derived from a combination of private investment and legislative-led federal project funding and incentives.

According to the report, a large number of new projects have recently begun and many more are in planning. Forecasts for the construction end market, specifically non-residential and non-building, combined with strength over the last several quarters and the recent spike in starts, together translate into expectations for consistent growth in activity levels for the next several years.

2. Economic headwinds will continue

It used to be that residential and non-residential markets were closely linked, however, according to Ashtead’s report, that is not the case today. The company says it’s increasingly clear there is less correlation between residential and non-residential construction in this era of mega projects and the larger-than-ever-before-seen federally funded initiatives.

The dynamics of supply constraints, inflation and skilled trade scarcity as it relates to end markets and Sunbelt Rentals’ business is key. The company states those three important factors have proven not to be transitory and expects inflation will soon moderate, but that supply constraints and skilled trade scarcity will continue.

The company anticipates several quarters ahead of tough access to the supply of new rental assets and associated parts, and these factors will prevent the industry from building up too much fleet.

Ashtead states it does not expect to see much easing in the scarcity of skilled trade workers given that, in general, more are retiring than joining the workforce each year. The tailwind effect these factors have had in the recent past, which will continue in the near term, and how they drive structural change, should not be underestimated, the report says, noting this structural change is expected to benefit larger rental houses, such as Sunbelt Rentals.

3. Markets remain strong

The markets Sunbelt Rentals serves remain strong, as both structural and cyclical trends are favorable. According to the company, the last four construction cycles have followed one of two patterns: From 1975 to 1982 and from 1982 to 1991, the initial recovery was very aggressive but the overall cycle was relatively short. In contrast, from 1991 to 2011, and 2011 to 2020, the cycle was characterized by a more gradual recovery over a longer period of time.

Initial forecasts for the next cycle are more similar to the last two cycles. While these forecasts are for growth through 2027, there could be bumps on the way due to inflation, the interest rate environment and other broader macroeconomic conditions. Ashtead says it believes its business model is well equipped to deal with this environment due to its ability to reduce capital expenditure and generate significant free cash flow.

In the event of a slowing economy, the impact will be mitigated to a degree by the opportunity from the structural shift from ownership to rental and the ability to increase market share, the company states. 

4. Market share expected to grow

Ashtead says it continues to grow market share in the US, despite being the second largest equipment rental company, and believes there is room to grow through acquisition of small independent companies.

Scale brings cost benefits and sophistication in areas like technology and other services, and this leads ultimately to further consolidation, the company states, adding that while there will always be a place for strong local players, the market share enjoyed by larger players is likely to continue to grow as the big get bigger.

Ashtead states this market share analysis is based on the traditional definition of the rental market focused on construction, however, a significant market for the company is facility maintenance, repair and operation of the geographic markets served, characterized by square footage under roof.

In the US, there are 100 billion square feet under roof, representing a potential rental market of $7-10 billion, with minimal rental penetration currently, according to Ashtead’s report.

“We believe the size of the rental market is understated and hence our, and everyone else’s, market share is overstated. This only serves to increase the opportunities for growth,” the company states. “We continue to set ambitious targets with our long-term market share target of 20%.”

5. The trend to rental

Rental penetration continues to deepen and those benefitting from this increased rental penetration are the larger, more experienced rental companies who can position themselves to be there for this increasing customer base and capitalize on this larger market, according to Ashtead.

Rental still only makes up around 55% of the US market compared to around 75% in the UK. However, this is a broad average with penetration levels ranging from low single-digit percentages for some equipment, up to 90%+ for large aerial equipment.

“We like specialty products because they are at the low end of this range, which provides greater scope for growth,” the company says. “We see the potential market penetration for rental equipment to be well over 60% in the US.”

The drivers of this evolution include significant cost inflation in recent years associated with the replacement of equipment, technical changes to equipment requirements and health, safety and environmental issues which make rental more economical and just easier.

Environmental regulations have driven further rental penetration through the reduction in fleet size by those customers who previously may have chosen to own some if not all of their larger equipment needs. Customers and smaller competitors with older fleets are faced with heavier replacement spend, causing them to replace less and rent or, in the case of smaller competitors, reduce their fleet size.

The difficulties of getting to grips with new technology and maintenance requirements have also caused more operators to decide to rent. Maintaining optimally serviced and therefore safe equipment can be a big outlay for a smaller operator. The diversity of Sunbelt Rentals’ fleet helps the company take advantage of the increasing trend to rental.

Ashtead’s report says the company’s development and use of technology is also driving rental penetration, as its proprietary customer management, inventory and delivery tracking systems contribute to this trend.

6. Legislation drives demand

There have been three major legislative Acts in the US that are beginning to drive increased demand in an already-active market.

The Infrastructure Investment and Jobs Act has a headline figure of $1.2 trillion with $650 billion allocated to renewing ‘ordinary’ run-rate federal investment in roads, bridges, rail, utility, etc. This Act not only supports the baseline investment but also the delivery of an incremental $550 billion in new project spending throughout the US. Over 10,000 programs and projects have already been identified, ranging from $100,000 to $3 billion, Ashtead states.

Second is the Chips and Science Act, putting in motion a revitalization of US domestic semiconductor manufacturing. The overall Act will invest $250 billion to progress American semiconductor research, development, and manufacturing and is designed to support directly or through tax credits, nearly $140 billion in new semiconductor manufacturing projects.

These projects are expected to consume a considerable amount of rental fleet and require highly sophisticated rental company capabilities. Ashtead states semiconductor manufacturing is as important to its future as data centers have been for more than a decade.

Finally, the Inflation Reduction Act, will provide $370 billion to fund directly or by way of tax credits, a broad range of energy production and manufacturing, ranging from solar field construction to battery factories, wind farms and EV (electric vehicle) production.