Vp plc is a specialist rental business providing products and services to a diverse range of markets including civil engineering, rail, oil and gas exploration, construction, outdoor events and industry, primarily within the UK, but also overseas.
Further progress & strong cash generation
Quality firms often use a crisis as a catalyst to streamline operations and improve services: not only building in downside resilience, but also winning market share as smaller rivals struggle.
We think plant hire specialist Vp falls into this camp. Today saying that revenues had climbed from 55% of pre-Covid levels back in April, to 80% in July - and were now running at circa 85%. Not surprisingly though, the pace of recovery has softened due to recent Covid related conditions.
They have prudently said that 17 (or <7%) of its 250+ depots (120 mothballed) would close, resulting in 150 redundancies. Leading to we ‘guesstimate’ an approx one-off cash cost of between £2m-£4m, yet equally generating a similar level of annualised savings from FY22 onwards.
In H1 alone, the group generated £41m of cashflow (split +£22m Q1 & +£19m Q2) thanks to tight working capital management, deferral of VAT/rent/rates, staff furloughing and a material reduction in costs, salaries & fleet capex. With net debt closing Sept at £118.7m vs £159.8m in Mar’20.
All told, meaning that to us at 650p there appears to be significant potential upside for patient investors. With the shares trading on modest FY’20 multiples of 7.2x PER, 1.5x Price:Book and 3.9x EV/EBITDA.Download Now Missing Out Get our research first
Improving conditions with more to come
The UK Construction PMI literally dropped off a cliff at the start of the Covid-19 lockdowns. But since then there has been a gradual recovery, with June’s 55.3 reading (vs 28.9 in May) being above expectations (of 47.0), and the highest for 2 years.
How is Vp performing? Well, after enduring a sharp -45% decline in April, trading has significantly improved, with revenues “now running at >80% of prior year levels”, driven by increased homebuilding, construction & infrastructure activity. An upwards trajectory that is anticipated to remain as existing projects are completed, & new ones brought on stream.
Encouragingly too, the group has generated £22m of positive cashflow over the past 3 months (>£12m in June alone) thanks to tight working capital management, deferral of VAT/rent/rates, staff furloughing and a material reduction in costs, salaries & fleet capex. With net debt closing June at £138m vs £159.8m in Mar’20.
Meaning that over 2/3rds of Vp’s furloughed employees have returned to work with many previously mothballed sites also now open. Going forward, we reckon trading should fully recover sometime in 2021. And over a 2-3 year timeframe, there is a chance that profit margins and ROCE might even be able to climb further, on the back of a leaner organisational structure.
With regards to valuation the shares at 700p appear attractively priced - equivalent to trailing FY20 multiples of 7.8x PER, 1.7x Price:Book and 4.3x EV/EBITDA. We hope to reinstate our forecasts and valuation later this year.
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Chance to emerge from CV-19 even stronger
On June 10 this UK (91% sales) & International (9%) plant hire specialist posted in line results for the year ending March 2020 with adjusted PBTA at a record level of £47.1m. Adding that, although demand slowed sharply in April across some parts of the group (revenues down 20%-70%), conditions have since improved as more construction sites reopen under social distancing rules.
Moreover, even under the bleakest of scenarios - assuming a hypothetical 40% contraction in turnover (vs pre-CV19 budget levels) for the whole of FY21 - there would still be sufficient liquidity (headroom £57.3m as at 31st May’20 vs £47.7m y/e) to meet all agreed banking covenants (see full note below). Besides, Vp generated +£9.6m of cashflow anyway during April & May. More realistically, we believe UK building activity will gradually recover over the next 12-18 months. With the large national housebuilders finishing existing developments first over the summer, and breaking ground on fresh projects later in the year.
Discretionary spend has already been prudently cut, meaning that over a 2 year time horizon, there is a decent chance that profit margins and ROCE might even be able to improve on the back of a re-sized cost base. The final dividend has also been deferred and forward guidance prudently removed.
We have retracted our forecasts and valuation until there’s greater clarity surrounding coronavirus. Yet the shares at 800p appear attractively priced, trading on trailing 8.9x PER, 1.9x Price:Book and 4.9x EV/EBITDA multiples - offering upside potential for patient investors vs peer group averages.
Safe harbour amidst COVID-19 storm
Anyone who thinks that COVID-19 isn’t impacting vast swathes of the global economy, is either still in denial or cloud cuckoo land.
Therefore it is reassuring to hear a company continuing to deliver solid results, despite the considerable challenges. Today, specialist equipment rental firm Vp said that H2’20 trading had been “satisfactory”.
With softness in UK construction, particularly around London & the South East (pre/post the UK General Election) – being partly offset by infrastructure & housebuilding, which “held up well”, reflecting low borrowing costs, good mortgage availability and the popular Help to Buy scheme.
As such, the Board anticipates FY20 adjusted pre-tax profits to be “marginally behind expectations” (revised ED est of £47.2m vs previous consensus at £49.6m) – ending the period with a net debt of £165m (or circa 1.7x EBITDA, pre IFRS16).
What’s more, Vp has been through this type of short, sharp, economic shock before - and come out the other side in far better shape than many of its rivals. We reckon this will happen again, even if near term demand is pushed to the right by site closures, business interruption and social distancing measures.
Besides, there are other levers to pull if things were to significantly deteriorate. Not least, shrinking fleet capex (Est £60m gross in FY20), cutting discretionary spend and accelerating plant hire disposals for either under-utilised or aged equipment.
Consequently at 525p, the stock appears attractively priced, trading on trailing 5.5x PE, 1.2x Price:Book and 3.8x EV/EBITDA multiples - offering substantial potential upside vs our 860p/share valuation (vs £10.75 before).Download Now Missing Out Get our research first
An ideal stocking filler for patient investors
On track to hit FY20 expectations
The holy grail for corporates is to create a sustainable edge that produces superior returns over the long term, and whose advantage is not eroded by time or competition. We think specialist plant hire firm Vp, with its strong niche positions, has achieved this. Whatâ€™s more at 810p, its shares today trade at an historically low 8.0x PER, whilst also paying a 4.0% yield.
Sure there are some macro headwinds, such as Brexit, lackluster global growth and US vs China trade wars. Yet equally the company is performing well, as illustrated again this morning. Here the group said that FY20 was on track to hit expectations. UK infrastructure spend is â€œholding up wellâ€, whilst housebuilding remains stable, due to near-record levels of employment, low borrowing costs, good mortgage availability and the popular Help to Buy scheme. Partly offset by softness in general construction, particularly centred on London and the South East
Elsewhere, the Â£69.2m acquisition of Brandon Hire in Novâ€™17 has been successfully integrated with Hire Station. Some of the synergies will be realised later, albeit we estimate the deal should ultimately deliver c.Â£4m of annualised savings, related to procurement/cost improvements, economies of scale and greater asset/inventory utilisation. In turn, boosting the original RoI from 8.7% to >14% - materially above Vpâ€™s â€˜through cycleâ€™ cost of capital
Lastly, despite experiencing a â€œsofter start to FY20â€ than anticipated, Vpâ€™s International division has recently enjoyed an uptick in activity levels across petrochemical and test & measurement. All told, we reiterate our adjusted FY20 PBT forecast of Â£49.6m and 1,075p/share valuation â€“ offering 33% upside to patient investors.Download Now Missing Out Get our research first