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Rental expert has all the right qualities of a great investment
Thursday 29 Nov 2018 Author: Ian Conway

One recurring theme when polling UK fund managers on their current stock picks is that they are rejoicing at the chance to buy high-quality businesses on single-digit earnings multiples.

VP Group (VP.), the specialist equipment rental firm, was almost trading on a single-digit rating earlier this month despite generating a return on average capital employed of 15% in the last financial year.

It comprises five market-leading equipment rental businesses in the UK and two overseas units. Its main UK markets are the maintenance and upgrade of rail, transmission and water infrastructure together with civil engineering, construction and housebuilding.

Despite the negativity surrounding domestic growth and the risks to the UK economy from Brexit, ‘day to day activity seems to be continuing largely unaffected’ according to chairman Jeremy Pilkington.

If anyone can claim to have ‘been there, done that’ it’s the senior management team at VP. The chairman was first appointed to the board in 1979, followed by chief executive Neil Stothard in 1997.

Its core markets are driven by major infrastructure projects which require a high level of ongoing government investment.

For example, Network Rail receives funding in five-year blocks called Control Periods to ensure that it provides a safe, reliable and efficient service to train operators.

The current Control Period, CP5, expires next March and the budget for CP6 from next year to 2024 has been increased by almost 20% to £48bn.

Similarly the water industry invests in maintaining and improving its service on a five-year basis with the current spending programme up to 2020 estimated by Ofwat at £44bn.

VP supplies the indispensable kit which contractors need to make sure the work is carried out as per requirements.

Its other UK businesses are focused on construction, where it is involved in the fit-out and repair-and-maintenance processes, and housebuilding where it supplies equipment to the new-build market.

In construction, trading at its Hire Station subsidiary is buoyant and revenues have received a major boost with last year’s acquisition of Brandon Hire, while the housebuilding market is supportive.

The weak link at the moment is the overseas offshore oil and gas market where demand for compressors and generators is heavily dependent on exploration and production spending which in turn depends on crude prices.

However management are confident that the business can ride out the current lull and it isn’t causing a distraction.

With expert investors like Tellworth fund manager Paul Marriage raving about the stock (see 8 November edition of Shares), VP is a welcome domestically-focused addition to our Great Ideas roster at £10.

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