Better-than-expected full-year results from construction equipment rental group VP (VP.) have boosted stock by 6% to 358.25p, yet the small cap could rise further still before it catches up with its rivals.


Companies that hire equipment to construction and infrastructure providers have all enjoyed strong share price appreciation over the past few years, thanks to a mixture of self-help measures and better demand. Both these factors have contributed to improved earnings and regular upgrades from analysts as they forecast higher and higher profits.


VP, alas, has been left in the shadows compared to its larger peers Speedy Hire (SDY) and Ashtead (AHT). The main reasons are that Speedy is adding greater service capabilities, so it is winning large contracts; and Ashtead is benefiting from a large presence in the US where there is structural shift from owning to renting equipment among construction companies.


VP - Comparison Line Chart (Rebased to first)


The charts (above and below) illustrate how VP has lagged its peers. Broker N+1 Singer says this outcome is undeserved and reckons the company's intrinsic value is more than 400p.


ahtVP - Comparison Line Chart (Rebased to first)


VP has today reported a 9% increase in pre-tax profit to £17.4 million, slightly ahead of £17.1 million analyst expectations. Of particular note is the improvement in operating margins from 11.5% to 11.9% and return on capital employed moving to 13.3% from 13%.


The company says margins are getting better due to better cost control and 'ensuring that the revenue we are generating is of the best quality.' It has chosen to withdrawn from certain contracts after declaring them to have sub-optimal margins. This explains a small reduction in revenue at TPA as it decided various outdoor events work wasn't worth doing.


Aside from TPA, the five other business divisions all recorded revenue gains. In fact, TPA did grow profits despite lower revenue. Yet the only disappointment on the profit side was Airpac Bukom, the oil and gas division. This was a result of tough comparative figures from the previous year where VP had large contract which ran its course.


The company says oil and gas work is now picking up, particularly Airpac Bukom's core skill of providing support to well testing. It flags particular success in the Middle East including Kurdistan where a number of high value rentals were obtained for well test projects.


Shares last year described VP as 'an ideal stock to buy and tuck away for long-term capital appreciation and income'. While it may lack the obvious catalysts driving Speedy Hire and Ashtead, there is reason to stay positive as VP continues to broaden its earnings streams. Non-hire work is gathering pace including training as part of Hire Station, its tools business. And the Groundforce arm has a team of engineers in Leeds who provide drawings and designs for large excavation projects. VP sees this 'highly-valued' skill as important for a push into mainland Europe.


To learn more about the asset rental sector and its prospects, read our sector report from April and our recent 'griller' with Speedy Hire from March. A 'griller' interview with VP from last October can be found on this pdf, pages 42-43.

Issue Date: 04 Jun 2013