Vp in two minutes

A two minute monologue

What it does: equipment hire

Vp is an equipment hire company supplying the construction, engineering, oil and gas exploration, rail and outdoor events industries through six businesses.

Category: quality cyclical

Its biggest businesses, Hire Station, Groundforce, and UK Forks serve the UK construction industry, which is sensitive to economic growth, so Vp is in a down-cycle.

So far, it’s managed the down-cycle better than it managed the boom years preceding the credit crunch when it spent nearly £60m on acquisitions and invested heavily in equipment, adding unacceptable (to me) amounts of debt to the balance sheet.

Since 2009 it’s reduced investment and paid off enough debt to make the company interesting again. In 2011 return on equity was 12%, down from 21% in 2008 and 2009 so Vp is cyclical, but to be earning 12% when times are bad is impressive.

I think Vp’s a quality cyclical, that has demonstrated, at least since the credit crunch, it can adjust investment to match the state of the economy.

It also operates in diverse markets, with rail maintenance and international oil and gas contracts performing during recession, as well as specialist equipment like large bracing systems.

What needs to happen

With debt at acceptable levels, and profits, sales and investment in equipment all rising strongly in Vp’s half year results, the business may be stabilising. Over the last two years, Vp has only made one acquisition (costing £0.7m) and I think it must continue consolidating.

What could go wrong:

competition
Equipment hire is competitive, but judging by its high returns Vp seems to be in a strong position. I don’t see competitors undermining that, although VP might…

management
Management is the biggest risk. Before 2006 Vp looked like an exemplary business. Then suddenly it adopted an expansionist mind-set. The recession has quelled its ambition, but the company is more indebted than it was and it hasn’t publicly admitted it over-invested between 2006 and 2009…

Maybe Jeremy Pilkington has privately admitted it. The chairman, who has an interest in over half the company, has more to lose from recklessness than anyone else and bearing in mind he built the business, it seems harsh to write him off after one bout of mildly irrational exuberance, that has yet to end in catastrophe.

company finances
With the ratio of equity to assets close to 50%, Vp is at the upper limit of my endurance for indebtedness so any increase in debt would be risky, but this is at management’s discretion. They have the means to use cash flow to pay down debt by not being in such a rush to invest.

valuation
Provided Vp grows cautiously I think it should be able to earn a 13% return on equity in future, as it has in the past, and with the current price at 1.1 times book value the shares look cheap.

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I added £1,000 worth of shares at 226.31p a share to the Thrifty 30 this morning, the actual price quoted by my broker, after deducting £10 in fees and £5 in stamp duty.

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