Interactive Investor

Vp upgrade cycle in full swing

27th November 2014 12:41

Lee Wild from interactive investor

"Outstanding," is how chairman Jeremy Pilkington described Vp's half-year results, and it's hard to disagree. Despite three earnings upgrades recently, the equipment rental company still beat expectations and analysts have been forced to rethink their numbers again. Yet, even now, the shares trade at a discount to peers.

Revenue grew by 11% to £101.3 million, but a 200-basis point increase in margin to 16% generated 27% growth in underlying pre-tax profit to £16.2 million. That's a reflection of the operational gearing of a rental business. "We're just putting more through the same engine," managing director Neil Stothard told Interactive Investor.

Most of the improvement came from the three largest divisions, drivers first flagged in August. A further improvement in the housebuilding sector and uptick in construction activity sent operating profit at the forklift truck hire business UK Forks up 54% to £2.3 million on revenue up 9%. Tool hire unit Hire Station made £4.8 million, up 78%, and Groundforce, which supplies excavation gear and equipment to shore up the sides of very big holes, grew by 7% to £5 million.

Analysts at N+1 Singer have been crunching the numbers and, after already upgrading forecasts three times since final results in June - cumulatively by over 10% on full-year 2016 estimates - has upgraded by another 5% for the each of the next three years, largely due to stronger margins.

Look for revenue of £200.8 million in the year to March 2015, says Singer, with pre-tax profit up at £24.3 million and adjusted earnings per share (EPS) of 44.7p. It's £25.9 million and 48.2p for the year after.

Of course, there could be some slowdown at Groundforce given the water industry's latest five-year asset management plan period ends in 2015. But that should be more than offset by demand from the housebuilding sector, construction and transmission. There are more major civil engineering taking place outside the South East, too.

Elsewhere, Airpac Bukom more than doubled profits to £1.7 million, driven by demand for high pressure air compressors and steam generators from the Liquefied Natural Gas (LNG) industry in South East Asia and Australia. Yes, the oil price "has also not been helpful," but there's still been plenty of work in the Americas and the Middle East/North Africa regions.

There was some weakness at the trackside lighting operation as extra investment and the integration of a recent acquisition knocked margins. We're told this is only temporary. Thing are a little tougher at portable roadways business TPA where margin pressure is expected to continue into the second half.

N+1 Singer is bullish:

Vp's share price performance has been somewhat sluggish in recent weeks, underperforming peers. Today's results provide a timely reminder of Vp's qualities and growth potential. Vp currently has the best earnings upgrade momentum in the peer group and we believe that a Cal'15 P/E rating of 15x, in line with peers, would be fully merited, suggesting intrinsic value of c.700p.

Vp shares are up 6% on these results and have rallied hard since last week. In fact, they’re almost back near pre-September sell-off levels and nudging a major level of technical resistance (see chart). At 623p, they trade on less than 14 times forward earnings, dropping to under 13 the following year, but high operational gearing raises the prospect of further earnings upgrades and. That big discount to the sector looks unfair.

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.

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