Why Vp beats rivals hands down

In June, we drew attention to tool hire company Vp. The shares had broken out of a tight trading range and further upside looked inevitable. The price rose sharply afterwards, and despite rivals issuing profits warnings like confetti, they've held up well. Interim results just announced demonstrate why.

Pre-tax profit jumped by 6% in the six months ended 30 September on revenue up 4% to £105 million. Return on capital improved 120 basis points (bp) to 16.1% and the interim dividend jumps 7% to 5.35p.

Both newly-floated HSS and Speedy Hire lost their CEOs after issuing two profit warnings in quick succession this summer. But how come Vp can keep growing profits when listed peers have failed so miserably? It was a question I put to managing director Neil Stothard Wednesday.

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"We've operated our current structure for 10 years now. We're split into divisional segments and focus on specialisation. We're not a jack of all trades, which is something our customers value.

"Our six divisions also have a spread of market exposure, which allows us to ride out the inevitable downturn in certain markets from time to time. It's that ability to have the diversity of exposure of markets to cancel out short term downturns. The balance sheet in good shape, too."

That makes perfect sense, and is borne out by these results.

Small tools rental operation Hill Station grew profit by 27% to £6.1 million on sales of £39.2 million, up 9%. UK Forks, which hires out rough terrain material handling equipment, made an extra £2.9 million, or 25%, and profits at Vp's Groundforce excavation equipment division swelled by 12% to £5.6 million.

Biggest fear this time was the Airpac Bukom unit, which supplies the oil industry. And a 25% slump in revenue to £8.5 million did wipe out £0.7 million, or 41%, of profit there. However, costs have been cut, and Vp has pushed into areas where activity is stronger like LNG. Remember, too, that Airpac is only 10% of the overall business.

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'Under-promise, over-deliver'

And today's Autumn Statement may provide a boost for Vp. While it does not rely on significant growth in UK housebuilding, a long-lasting recovery is certainly a boon. Also, with home completions still at historical lows, and with current building works woefully short of what's needed, omens are good. 

Management's mantra of "under-promise, over-deliver" has proven highly successful over the years. Diversification and specialisation has, too. And, according to the analysts, the next few years should be more of the same.

Broker N+1 Singer upgrades earnings per share (EPS) estimates, due partly to the contribution from the recent £4 million Test and Measurement acquisition, and partly to these numbers. Look for EPS of 54.7p in the year to March 2016, rising to 58.7p in 2017 and 61.4p the year after.

Up 4% Wednesday to 760p, Vp shares now trade on a forward price/earnings (PE) ratio of 13.9 times, dropping to less than 13 for the year after. Meet expectations, and Singer thinks a forward multiple of 14.5 times is more appropriate, giving fair value of around 850p.

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.