A quality cyclical, specialist hire company Vp’s assets now appear to be recognised by the market.

Landlord

Vp owns or leases equipment for hire to the construction, engineering, oil and gas exploration, rail and outdoor events industries through six businesses predominantly in the UK although it’s expanding in Europe and supplies the oil and gas industry in diverse locations. By revenue the biggest business is Hire Station, with 90 tool and equipment hire centres, by profit it’s construction specialist Groundforce.

Cyclical / Stalwart

The UK construction industry, Vp’s biggest market, is sensitive to economic growth, so Vp is in a down-cycle. It’s managing better than it managed the boom years preceding the credit crunch when it spent nearly ''60m on acquisitions and invested heavily in equipment, adding debt to the balance sheet.

Since 2009, it’s remained profitable, currently returning about 7% on tangible assets, reduced investment and paid off enough debt to make the company interesting again. Vp looks like a quality cyclical, that has demonstrated 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 well during recession, as well as specialist equipment like large bracing systems.

Expectations

With profit, sales, and investment in equipment all rising strongly in 2012 without recourse to acquisitions or increasing debt (despite buying back shares worth ''7.8m through a tender offer), Vp is plotting a cautious route through difficult economic times. Caution is appropriate given it employs a fair amount of leverage, and the best way to grow appears to be the company’s chosen one, investing in the most profitable plant and equipment while retiring less profitable plant and equipment.

Threats

competitive position ' neutral
Equipment hire is competitive, but judging by Vp’s strength through recession and positions in niche markets, it should continue to compete profitability.

finances ' neutral
Including the approximate capitalised value of operating leases, Vp has borrowed 54% of the value of its tangible assets, which is lower than some rivals but nevertheless a significant obligation. Vp’s demonstrated it can manage a higher level of debt and operating leases even during recession, albeit by reducing investment, so the current level is probably not high enough to worry investors.

management ' strong
Before 2006 Vp looked like an exemplary business. Then suddenly it adopted more expansionist mind-set. Now the company is more indebted than it was and less profitable.

That’s partly due to a more austere economic environment, which the company has adjusted to without ever looking troubled. The chairman, who has an interest in over half the company, has more to lose from recklessness than anyone else. He built the business, has an interest in about half of the shares, and having experienced the effect of recession appears to be running Vp for the long-term benefit of shareholders.

valuation ' neutral
Including operating leases as well as debt in the market valuation of Vp gives an unlevered post-tax earnings yield of 7%, the same as its seven-year average, and its seven year free cash flow yield. These numbers may all be slight underestimates due to cautious assumptions embedded in them, but even so, thanks to its rising share price, Vp is no longer in obvious value territory.

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