Vpwww.vpplc.com TICKER: VP. EXCHANGE: FTSE
Vp plc is a specialist rental business providing products and services to a diverse range of markets including civil engineering, rail, oil and gas exploration, construction, outdoor events and industry, primarily within the UK, but also overseas.
Anyone who thinks that COVID-19 isn’t impacting vast swathes of the global economy, is either still in denial or cloud cuckoo land.
Therefore it is reassuring to hear a company continuing to deliver solid results, despite the considerable challenges. Today, specialist equipment rental firm Vp said that H2’20 trading had been “satisfactory”.
With softness in UK construction, particularly around London & the South East (pre/post the UK General Election) – being partly offset by infrastructure & housebuilding, which “held up well”, reflecting low borrowing costs, good mortgage availability and the popular Help to Buy scheme.
As such, the Board anticipates FY20 adjusted pre-tax profits to be “marginally behind expectations” (revised ED est of £47.2m vs previous consensus at £49.6m) – ending the period with a net debt of £165m (or circa 1.7x EBITDA, pre IFRS16).
What’s more, Vp has been through this type of short, sharp, economic shock before - and come out the other side in far better shape than many of its rivals. We reckon this will happen again, even if near term demand is pushed to the right by site closures, business interruption and social distancing measures.
Besides, there are other levers to pull if things were to significantly deteriorate. Not least, shrinking fleet capex (Est £60m gross in FY20), cutting discretionary spend and accelerating plant hire disposals for either under-utilised or aged equipment.
Consequently at 525p, the stock appears attractively priced, trading on trailing 5.5x PE, 1.2x Price:Book and 3.8x EV/EBITDA multiples - offering substantial potential upside vs our 860p/share valuation (vs £10.75 before).
The holy grail for corporates is to create a sustainable edge that produces superior returns over the long term, and whose advantage is not eroded by time or competition. We think specialist plant hire firm Vp, with its strong niche positions, has achieved this. What’s more at 810p, its shares today trade at an historically low 8.0x PER, whilst also paying a 4.0% yield.
Sure there are some macro headwinds, such as Brexit, lackluster global growth and US vs China trade wars. Yet equally the company is performing well, as illustrated again this morning. Here the group said that FY20 was on track to hit expectations. UK infrastructure spend is “holding up well”, whilst housebuilding remains stable, due to near-record levels of employment, low borrowing costs, good mortgage availability and the popular Help to Buy scheme. Partly offset by softness in general construction, particularly centred on London and the South East
Elsewhere, the £69.2m acquisition of Brandon Hire in Nov’17 has been successfully integrated with Hire Station. Some of the synergies will be realised later, albeit we estimate the deal should ultimately deliver c.£4m of annualised savings, related to procurement/cost improvements, economies of scale and greater asset/inventory utilisation. In turn, boosting the original RoI from 8.7% to >14% - materially above Vp’s ‘through cycle’ cost of capital
Lastly, despite experiencing a “softer start to FY20” than anticipated, Vp’s International division has recently enjoyed an uptick in activity levels across petrochemical and test & measurement. All told, we reiterate our adjusted FY20 PBT forecast of £49.6m and 1,075p/share valuation – offering 33% upside to patient investors.
Vp plc has produced an outstanding set of Interim results this morning, showing adjusted PBTA up 27% at £16.2m, EPS up 23% at 32.8p and the Interim dividend up 39% at 5p. The big increase in the Interim dividend is partly to address the historic differential between Interim and Final dividends, but also to reflect the excellent set of results.
The company has reported that Housebuilding continued to be buoyant, and that they also saw sustained improvement in the general construction market. Reflecting this, Vp's Hire Station division produced interim profits up 78% at £4.8m, and UK Forks profits rose 54% to £2.3m.
As a result of a very strong H1, and a positive outlook statement, we are raising our forecasts for the 5th time in the last 6 months. We now forecast PBTA to rise 21% to £24.2m in the year to March 2015, and EPS to increase by over 15% to 48.4p. Our full year dividend forecast is now 16p, up 14% on 2013/14's 14p.
As a result of these increases, we raise our target price to 725p per share (previously 700p). Vp's shares still look very good value relative to their peer group.
Following better than expected full year results in early June, and a very positive AGM statement a week ago, Vp plc yesterday announced the acquisition of the trackside plant and equipment rental activity of Balfour Beatty Rail Ltd , for a cash consideration of £5.5 million.
The business will be integrated into Torrent Trackside, Vp's successful specialist rail business. The acquisition includes a 5 year framework agreement for the hire of trackside plant and equipment to Balfour Beatty Rail across the UK.
Vp has a history of successful "bolt on" acquisitions in recent years, and this looks like another such deal. Our current fair value is 687p per share.