Dig a hole with the little ones on the beach and you will know that, just when Australia seems within reach, the sides fall in. Builders excavating foundations for tower blocks or the like face much the same problem. Specialist rental firm Vp provides a solution; while a recent share buy-back and increased spending on equipment show that its bosses think the bottom of the construction cycle is near. City analysts have been upgrading their earnings estimates and, if management is right, we think shares in this small-cap player with a solid dividend record look cheap.
- Brokers upgrading forecasts
- Diversified business
- Exciting growth at Airpac Bukom
- Share buy-back
- Water companies slow to spend
- Difficult to deal in shares
Vp is well diversified, supplying rental equipment to industries as diverse as railways and water utilities, as well as landmark construction projects such as Wembley stadium. Such diversification helped it ride out the last downturn as Vp provides not just the giant hydraulic shoring equipment for those deep excavations, but also forklift trucks and tools for the construction industry. The most exciting growth, however, is coming from its Airpac Bukom division, which serves the oil and gas sector. Mainly focused on oil and gas exploration, in the first half of 2011-12 the division reported sales up 16 per cent to £10.2m and profits up 41 per cent to £2m, as projects in the Middle East, Brazil and north Africa delivered.
That diversification has helped Vp turn a corner. Its chairman, Jeremy Pilkington, said the first-half results demonstrated "strong revenue and profit growth along with excellent cash generation". Last month, Vp said that trading had been strong through the winter and that it expected to report full-year profits "moderately ahead of current market expectations". Analysts duly increased their forecasts.
VP (VP.) | ||||
|---|---|---|---|---|
| ORD PRICE: | 257p | MARKET VALUE: | £103m | |
| TOUCH: | 246-257p | 12M HIGH: | 260p | LOW: 191p |
| DIVIDEND YIELD: | 4.3% | PE RATIO: | 9 | |
| NET ASSET VALUE: | 206p | NET DEBT: | 46% | |
| Year to 31 Mar | Turnover (£m) | Pre-tax profit (£m) | Earnings per share (p) | Dividend per share (p) |
|---|---|---|---|---|
| 2009 | 157 | 20.8 | 36.4 | 10.8 |
| 2010 | 134 | 14.3 | 24.7 | 10.8 |
| 2011 | 141 | 12.2 | 23.4 | 10.8 |
| 2012* | 153 | 14.8 | 25.3 | 10.8 |
| 2013* | 159 | 16.0 | 27.8 | 10.8 |
| % change | +4 | +8 | +10 | nil |
Normal market size: 1,000 Matched bargain trading Beta: 0.6 *Peel Hunt forecasts (profits and earnings are not comparable with historic figures). | ||||
Further upgrades may well follow. Infrastructure spending on the UK's railways has been given a boost by the government and water utilities may spend an estimated £22bn during their current five-year pricing period, which runs until 2015. Recent public opprobrium over leaks and droughts should open the floodgates on spending after a slow start. That will help Vp's groundforce division.
Vp's rail servicing arm, Torrent Trackside, is already showing the results. It reported sales up 62 per cent to £10m and operating profits almost tripled in the first half of 2011-12. The groundforce division is taking longer to see the cash coming through – it reported sales growth of 11 per cent to £17m, with profits flat. But this division will benefit when the water utilities do spend.
Management has clearly signalled that it expects this momentum to continue. Spending on new rental equipment rose strongly from £8.9m to £15.9m in the first six months of the year, and analysts now expect about £23m to be spent during the year.
