Vp: not as silly as it sounds

It all started with a vibrating roller

Not often you can say that about a company, is it? The ‘V’ in Vp is for ‘Vibrating’ and, fortunately, this story gets duller from there. The ‘p’ stand for ‘plant’, as in Vibrating Roller and Plant Hire Ltd., founded in 1954. The name was later contracted to Vibroplant, and then Vp.

For aficionados of silly-sounding names, the joy goes on. Its six equipment hire businesses are Airpac Bukom, Groundforce, Hire Station, Torrent Tracksides, UK Forks and the disappointing TPA.

It’s a shame Vp got rid of the Vibrating Roller and Plant Hire and Vibroplant monikers as my guru for this year Peter Lynch loved companies with boring names, and companies with ridiculous names even more so. A ridiculous name was one more reason investors might be turned off a company, unless of course they already realise how profitable it is.

I wonder if investors realise how profitable Vp is. I think it might be a stalwart priced like a cyclical. The shares cost about the company’s book value, even though looking at its record (in Sharelockholmes) it has produced a return on book value (aka equity) of more than 10%, fairly consistently, whilst growing that book value, also fairly consistently, with recourse only to modest amounts debt (equity is nearly 50% of assets). This, I must confirm by extracting the data from the annual reports.

Being in plant hire, investors might expect Vp to be cyclical as the requirement for equipment ebbs and flows with the requirement for new construction, for example. In its half year results, published in November, the company credited its diverse markets (such as oil and gas exploration, events, and tool hire as well as fork lift trucks and construction equipment), as a reason for its resilience, and continued growth despite the the economic circumstances.

So that might be the wrinkle, the market misunderstanding that leads to mispricing. Investors don’t trust the earnings of, often more indebted, hire companies. Recalling how Ashtead almost went bust in 2003, and the rise and fall of Speedy Hire, it’s understandable.

There’s another wrinkle too. Investors probably don’t like the fact chairman Jeremy Pilkington has an interest in over half the shares through an investment company. It limits the ability of large investors to influence management, and the spread of nearly 5% today means that anybody buying Vp shares will experience an immediate paper loss of up to 5%. Not a good start if you want to make a quick profit.

This wrinkle falls into the category of things other investors hate that I like. For small investors with little chance of influencing a company who are often sceptical of the intentions of their institutional brethren, lack of control is not much of a concern. Indeed, since Pilkington is the company’s biggest shareholder by far we can hope he runs Vp in the long-term interests of shareholders.

Managing director Neil Stothard also has a largeish interest in the company, worth over £1m, and he’s been running the company with Pilkington since 2004 (Pilkington had been chairman and chief executive since 1981). Since Stothard was finance director between 1997 and 2004, it seems reasonable to give them credit for the successes of the last decade.

I think that sounds like the bones of a two minute monologue, and possibly the rationale for 2012’s first new addition to the Thrifty 30.

Next I need to plough through ten years of annual reports to corroborate or undermine it.

13 Comments

rijk January 20, 2012 at 1:16 pm

everything looks great, except for capex, looks like the business requires levels of capex equal or exceeding operating cash flow….. consequently fcf doesn’t look that great

regards
rijk

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- Richard Beddard January 20, 2012 at 1:31 pm
  
  Thanks for the warning Rijk. I’ll see if that’s a one-off or it’s happening repeatedly over the decade. If net cash flow from operations is typically less than net profit it will be a disappointing end to my affair with Vp.
  
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Will January 20, 2012 at 3:53 pm

It will be interesting to know what you discover.

I think there is a typo in the note though; you mean 2010 not 2012!

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- Richard Beddard January 20, 2012 at 4:17 pm
  
  Capital expenditure certainly very lumpy – some years free cash flow is well in excess of earnings, others massively below it but it looks to me net cash flow from ops (i.e. before capex) is consistently above earnings. That might be enough in a growing business (Just had a quick squiz at the data from Sharelockholmes before diving into the annual reports. The usual charts will follow from the annual report data)…
  
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Will January 20, 2012 at 3:54 pm

….now there is a ‘typo-squared’: i meant to type ’2012 not 2010′.

Will

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- Richard Beddard January 20, 2012 at 4:08 pm
  
  Oh well, at least I’m not the only one going mad! It’s corrected now
  
  Thanks Will.
  
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John Kingham January 20, 2012 at 5:02 pm

I’ll be interested to see what you think of this one. It’s near the top of my list but I don’t look at small caps anymore so I wouldn’t buy it, so I haven’t looked beyond the headline figures. Something that leaps out initially is debt, or more specifically interest.

Debt is about 3 times operating profit, but interest is only covered 6 times because they’re paying something like 6% interest on their debt. But like I say I haven’t looked at the details so what’s underlying those numbers I have no idea.

I guess the switch to VP was because Vibrating roller and plant hire is too narrow a description for what the group does now… but VP is a bit of a cop out, like SSE. Very dull.

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- Richard Beddard January 20, 2012 at 5:41 pm
  
  Hi John, thanks for bringing interest cover to my attention. I must admit it’s a statistic I happily ignore most of the time because I focus on the balance sheet primarily (in measuring financial strength). But you’re right it might be pertinent. I’m going through the annual reports plucking out data now, and feeling reasonably enthused still.
  
  The stalwart masquerading as a cyclical story seems to be borne out to a degree in that although profits dropped in 2011 and 2010 it was still in a pretty comfortable position. Compare that to some of the cyclicals I’m looking at (Titon simultanously) and I’m looking at a very gently undulating landscape!
  
  Incidentally, I’m very grateful to you and rijk for making me stop and think. I could very easily have got carried away with this one. One of the benefits of blogging decisions as you are thinking about them!
  
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Trident January 20, 2012 at 6:43 pm

Hi Richard

I don’t know anything about this one. But in general with analysing a plant hire business I think you have to pay particular attention to the capital spend and the depreciation charges and then you have to think about future capital spend. I’d be very wary of focussing on profits rather than cash flow in this sort of operation.

I guess these companies may be doing better these days simply because the cost of borrowing is so low, but that’s one metric that’s not likely to improve much in the future. Might be worth finding out their borrowing costs and stress testing their profit ratio at a higher cost.

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- Richard Beddard January 20, 2012 at 7:29 pm
  
  Hi Trident, it’s a good point about future borrowing costs. It looks to me (having just looked at the figures and not read the commentary in the annual reports at this stage) that Vp borrowed to make an acquisition in 2007 and spent aggressively in 2008 and 2009 (financial years) as in those years capital expenditure really did eat up nearly all the net cash flow from operations as rijk said. That investment was probably miss-timed given what happened to the economy subsequently but it hasn’t been calamitous for Vp, which says something about the strength of its business and may have warned management off further ventures for the time being (that’s pure speculation, I haven’t read a word they’ve said yet). The median ten year free cashflow return on equity is actually marginally higher than return on equity using the profit measure, which I’d say is a very good performance for a capital intensive business that is growing. Surprisingly good. Before 2007 it looked like an exemplary business.
  
  I’m glad this one has stirred up a bit of interest. I’ll put the spreadsheet up on Monday, and ten year charts, but I think they may be enough (subject to actually reading what happened 2007-9) for me.
  
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  - Richard Beddard January 23, 2012 at 9:50 am
    
    Actually, I’ll make that Wednesday. I’ve got some other stuff to do first!
    
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Franko January 20, 2012 at 7:10 pm

Looks like youv’e already made your mind up our kid…

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- Richard Beddard January 20, 2012 at 7:15 pm
  
  That’s the danger Franko!
  
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