Brandon acquisition was a masterstroke
Buying low and selling high is the dream of most stock pickers. The difficult bit is finding quality names sporting ‘wide moats’, run by capable management and trading at prices significantly below their intrinsic worth. That said, just occasionally the market divis up gifts to sharp-eyed investors.Enter Vp, a specialist tool hire business, which has fallen >25% over the past 2 months on the back of macro fears and a Competitions (CMA) investigation related to its Groundforce unit. Nevertheless, despite the UK economic miasma, otherwise known as Brexit, the company’s core UK construction, infrastructure and housebuilding units are still trading well. And whilst the CMA enquiry is undoubtedly something to watch, we suspect it also won’t ultimately end up being material in the context of the group’s £293m marketcap.
In terms of the numbers, FY19 revenues, adjusted EBITDA, PBTA, EPS and the dividend all climbed to record levels of £382.8m (+26%), £101.3m (+20%), £46.8m (+15%), 95.1p (+16%) and 30.2p (+16%) respectively. Sure ROCE dropped slightly to 14.5% (vs 14.8% LY), yet this was simply a function of owning Brandon Hire for a full 12 months.
Likewise costs and cashflow are being carefully managed, with net debt declining to £168.1m (vs £179.2m LY) - equivalent to a comfortable EBITDA multiple of 1.7x and falling to 1.6x 12 months’ later (see below) - even after investing £63.8m on fleet capex, offset by £20m (£18.5m LY) of equipment disposals.
Looking ahead, we have retained our FY20 PBT forecasts and £11.50/share valuation – offering potentially >55% upside. What’s more, the stock at 730p appears substantially undervalued on just about all metrics, particularly given its strong cash generation and robust balance sheet.
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