UK uncertainty weighs on VP

Equipment rental specialist VP (VP.) relies on construction market activity to drive annual revenue and profit growth. The year to 31 March was therefore challenging for the group, especially in the highly turbulent UK market, where it makes nearly 90 per cent of its sales.

The country’s infrastructure sector remained “generally supportive” across FY 2023, according to VP, with stable demand across the rail, transmission and water industries. However, activity at the notoriously delayed HS2 project, which kept the company busy across the prior year, slowed down significantly.

The group’s other large market exposure is in non-residential construction, where it said demand had remained stable, if “lacking any further signs of tangible recovery”. 

Looking ahead, it predicts that its infrastructure business will return to modest growth in the current financial year – driven by upgrades to water networks, the ongoing construction of Hinkley Point C and capital investment in offshore wind. VP has also forecast “modest improvement” in non-residential new construction in the UK.

The outlook for the firm’s international business – with operations in Australia, New Zealand, Malaysia and Singapore – is somewhat more robust. Management said the wide range of markets the division is exposed to, including outdoor events and mining, will prove supportive in the current year.

The division’s revenue grew by almost 25 per cent to £38.1 million in the year to the end of March, making it a standout performer in growth terms. Broker consensus compiled by FactSet says VP is currently trading on a forward price to earnings multiple of just eight times for FY 2024, suggesting it could be undervalued. But we’re inclined to see how things in its home market play out for now. Hold.

Last IC View: Hold, 690p, 29 November 2022