Vp offers resilient rental earnings and income

Harrogate-based Vp, formerly known as Vibroplant and floated on the London Stock Exchange in 1973, is a long-established concern able to trace its origins back to 1954. However, since 2001 the group has evolved from a general plant hire business into a fast-growing provider of equipment rental services across a diverse range of sectors including general industry, construction, oil and gas, rail and even water and utilities.

Under the stewardship of chairman Jeremy Pilkington and managing director Neil Stothard the Main Board-listed group has a strong record of profit, earnings and dividend growth. Vp continues to invest in its rental fleet to make sure products remain market leading, supplementing organic growth through canny acquisitions of specialist businesses complementing its tool hire operations. Offering resilient and sustainable earnings and income growth across a broad spread of markets, Vp is a perfect portfolio candidate.

Strategy

‘Our strategy is all about seeking market leadership for each of our businesses and being irresistibly the provider and employer of choice,’ explains Pilkington, insisting such ‘qualitative’ objectives are ‘highly interdependent with the group’s financial aspirations’ and, of course, shareholder value.

Together, Pilkington and Stothard have transformed Vp from a plain plant-hire concern into a highly successful specialist equipment rental venture enjoying higher margins and returns on investment. A portfolio of businesses generating good levels of growth as well as far superior margins and returns on capital employed (ROCE) has been put together organically and through acquisitions. ‘The quality of our returns continues to improve and last year we reported an excellent 16.5 per cent ROCE, an excellent return on capital invested, up from 15.4 per cent and comparable to the single-digit figures we would see in general plant,’ Stothard enthuses.

Businesses include Groundforce, which rents excavation support systems to the water, civil engineering and construction industries; UK Forks, which hires out rough-terrain material-handling equipment to the construction industry; and Airpac, a provider of specialist air compressors to the oil and gas sector. Hire Station rents smaller tools to industrial and construction clients, as well as specialist safety and lifting equipment; and Torrent Trackside hires out portable rail infrastructure equipment and lighting to the rail maintenance industry. Last, but by no means least, TPA supplies portable roadway systems, bridging, fencing and barriers for the European events market and the rail, construction and power transmission sectors.

Investors can expect continued reinvestment of strong operational cash flow into the rental fleet and infrastructure of these businesses to ensure they remain market leading. During the last financial year, more than £30 million of capital investment was channelled into the business organically, aside from the £4.6 million spent on three acquisitions. Inherently strong cash flow finances growth – the group generated an improved £29.8 million (£22.6 million) of cash from operations last year.

For an assets business, gearing remains low at 56 per cent (based on year-end net debt of £36.6 million), which compares to the 100 per cent gearing of some rival businesses and means Vp has plenty of debt capacity to finance acquisitions able to offer the requisite returns. ‘We’ve completed around 30 acquisitions that are of all shapes and sizes over the past five years that have given us good market positions,’ recalls Stothard. ‘Both financially and as a management team, we’re well placed for further deals in a fragmented market.’

Management

A significant part of the credit for the group’s recent success has to go to the enthusiastic, no nonsense Stothard, appointed to the board in 1997 when he assumed the finance director’s chair. Ambitious but never one to over-promise, he has been one of the key drivers of the strategy since assuming the managing director’s hot seat in 2004, overseeing a slew of acquisitions that have further diversified earnings.

Ensuring strategy remains on course from the chair is Jeremy Pilkington, Vp through and through and with interests closely aligned with shareholders, since he effectively speaks for 51 per cent of the company through family interests. Pilkington became executive chairman in July 2004, having previously held the roles of chairman and chief executive from 1981 onwards.

Finance director Mike Holt has been running the rule over the numbers since the summer of 2004, having previously earned his spurs with Rolls-Royce, where his senior positions included finance director of the procurement group. On the non-executive side, Stothard calls upon the business experience of Barrie Cottingham, who has been a non-executive director of the group since 1996 and who also lists construction group Dew Pitchmastic and Cattles among his non-executive directorships. Another non-executive is Peter Parkin, chairman of private house-building company Wheeldon Brothers and former chairman and chief executive of Raine.

Prospects

The group’s track record over the past five years should give investors encouragement. In terms of total shareholder returns (i.e. share price performance plus dividends), Vp has easily eclipsed returns from its benchmark FTSE Small Cap Index (see graph, right). Recently, the board unveiled a sparkling set of record results for the year to March, ahead of analysts’ forecasts, with margins on the rise.

Adjusted pre-tax profits increased by a third to £14.2 million – headline pre-tax profits rose 36 per cent to £14.5 million – on 22 per cent top-line growth to £122 million. Earnings sparked up 40 per cent to 24.5p, allowing a 25 per cent dividend hike to 8.25p. Although acquisitions made in prior years contributed strongly to profits growth, about a third of the operating profit gain was delivered organically.

Looking ahead, each constituent business has good organic growth prospects, as well as the potential to accelerate returns through acquisitions in consolidating markets. One of last year’s undoubted stars was Groundforce, whose profits grew 21 per cent to £6.4 million on £28.1 million sales on the back of good continuing market conditions in housing and construction, as well as a ramp up of activity under AMP4, the water sector’s latest capital investment drive.

Hire Station more than doubled profits to £3.1 million on £45 million turnover. ‘Three years ago Hire Station was making losses, so this really was a terrific result,’ beamed Stothard, flagging up organic growth supplemented through the acquisition of specialist pipework fittings company MEP. Since the year-end, prospects have been boosted further through the acquisition of Cool Customers, a specialist in the hire and sale of air-conditioning units, chillers and cooling equipment.

Prospects are robust at Torrent Trackside, where profits perked up 13 per cent to £2 million on £13 million sales in an ‘attractive’ but challenging rail infrastructure market. Torrent, which provides products improving operational safety and production, is a likely beneficiary of Network Rail’s ongoing rail expenditure, as well as London Underground’s investment drive in the run-up to the 2012 Olympics.

Spending from oil companies spurred by oil price strength and global demand for oil and gas underpins growth prospects at Airpac, where profits gushed higher from £1.2 million to £2.4 million last year as sales doubled to £10 million, and prospects continue to excite.

The outlook is fundamentally sound at two of last year’s relative underperformers, UK Forks and TPA. The former suffered a reduction in profits, though the business was affected by uncertainty caused by house-building sector consolidation and comparison with a strong prior year. Tellingly, activity is thought to be increasing again.

TPA derives a significant portion of sales and profits from the summer events market and suffered from more severe winter losses than originally expected. Nevertheless, the unit’s first year under Vp ownership was successful, with TPA moving from losses to operating profits of £1 million on £11.4 million (£2.5 million) sales. A major five-year programme of investment and upgrades by the National Grid of the electricity transmissions network across England and Wales should prove a catalyst for growth.

Valuation

Following the figures, Brewin Dolphin’s Michael Parkinson upgraded his 2008 numbers and now sees adjusted pre-tax profits of £16.3 million (upgraded from an earlier £15.9 million) from sales estimates increased to £134 million (£133 million) and argues earnings should grow by at least 12 per cent to 25.5p this year. By 2009, he thinks profits could spiral higher still to £17.9 million, driving earnings per share to 28.6p

for yet another year-on-year earnings increase of 12 per cent-plus. Given the capital already invested in growth, those numbers might even prove conservative.

Based on those forecasts, the shares are currently trading on a forward p/e ratio of 14.9, a rating that drops to 13.3 the following year, implying PEG ratios of 1.2 and 1.1 for the stock. While many companies trading on PEG ratios above one are often considered expensive, this is not the case with Vp since the group has a proven history of beating forecasts and has ample capacity to complete acquisitions that will bolster its growth rates. Then there’s the consistent and progressive dividend track record of the business to consider. Forecast payouts for this year and next are 9p and 10p, pointing to prospective yields of 2.4 and 2.6 per cent.

Forecast net debt for the current year is not inconsiderable at £44.3 million, but management considers the company under-geared if anything. Vp, which has an enterprise value of just under £220 million, ticks numerous boxes for investors and the shares are a strong buy.