Stockwatch: time to follow directors and buy this small cap

Have the small-cap shares in specialist equipment rental company Vp (LSE:VP.) finally reached an attractive level for risk/reward? Yesterday, the price closed up 2.3% at 524p after a trading update for the six months to 30 September affirmed expectations for the 31 March year, with the second half expected to outperform the first.

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This is notable in a UK macro sense given equipment hire is often a near-term indicator of the economy. With energy prices having risen and a tough Budget ahead, Vp’s update can seem like a signal of resilience. Mind, this company is significantly geared to water industry upgrading (reliable medium-term revenue), but visibility serving construction and housebuilding can be short, especially if stubbornly high energy prices persist.  

For what forecasts from the International Monetary Fund (IMF) are worth, today they upgraded 2026 UK economic growth from 1% to 1.3% while warning of a “slowdown” to 1.2% in 2027 precisely due to higher energy costs and interest rates. This to me is a typical “finger in the wind” approach, showing the risks with extrapolation. In 1989, after the Lawson Boom, I recall consensus was for a UK “soft landing”, but 1990 to early 1991 saw a significant recession.

The five-year chart can look as if Vp is establishing a support level this year from which a classic “bowl” pattern could evolve from apparently cheap earnings and yield criteria. But you could say a new uptrend manifested in the first half of 2024 then failed, so take care with assumptions from charts:

Source: TradingView. Past performance is not a guide to future performance.

Indeed, I succumbed previously, though not altogether to the chart, but it is a reminder how seemingly attractive valuation criteria in a cyclical share has real risks. Two years ago, I took a “buy” stance towards Vp at around 600p but warned: “do not if you already are weighted towards cyclicals”. The yield was 6.6% assuming the 39p per share dividend was maintained – it edged up to 39.5p. But even so the shares only appeared to bottom out at 424p last March having seen 28% downside.

In a true long-term context, however, that could have been an abnormal low, which three directors implicitly believe having just recently bought £278,000 of Vp shares. And it might have been that was the most they could fill their boots with in a tight market for this £210 million company.

Core markets look robust

Industries such as electricity transmission and water are performing well, with AMP8 – eighth five-year regulatory cycle for the water industry – aiding momentum. Vp’s international side (around 20% of turnover) - continues to perform “well” albeit we’ve seen no figures since a 14% growth rate in the March 2025 year.

In some respects, Vp is tagging onto infrastructure spending which I have noted as positive for various listed contractors. Major public works arising from AMP8 and regional development are among its primary markets. There’s also energy by way of global oil & gas exploration, power generation and nuclear stations such as Hinkley Point C. Rail and track maintenance implies further consistent revenues, likewise specialised safety, testing and surveying in telecoms and utilities.

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This is affirmed by the update citing electricity transmission continuing to perform well, rail remaining stable and encouraging momentum in water as AMP8 activity grew in the second quarter. Perhaps that is the enabler for strength (anticipated so far) in Vp’s second half, rather than the economy helping.

Construction is also involved – from general to fit-outs and earth-moving – and supplying residential housebuilders with telehandlers, tools and site equipment. Brandon Hire Station has improved after last year’s restructure, despite continued challenges in general construction, but I ask whether such “growth” might be a one-off if the operation consolidates at best should the overall market gets tougher in 2027.

In the last financial year, Vp’s international side (20% of group revenue) saw 30% profit growth, but the UK saw challenges especially in general construction, hence a £25 million restructuring charge for Brandon Hire Station and a reported pre-tax loss of £7.0 million.

Vp shares are thus rated modestly due to this uncertainty plus high gearing which amplifies risk in a worst-case scenario.

Balance sheet shows no sign of strain

Management understandably prefers to narrate in terms of net debt of £149 million excluding leases, although including them it was £212.5 million relative to £131 million of net assets. This meant an ongoing circa £10.3 million net finance expense relative to £3.2 million operating profit. If we add back the £25 million Brandon Hire restructuring charge, then interest cover was 2.7x.

Mind how current liabilities were 1.54x current assets, or a current ratio of 0.65. Bank debt is the chief culprit at £78.7 million, or 48% of current liabilities.

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At least in terms of near-term operational needs, the cash flow statement showed capital investment easing from £73 million to £59 million, the narrative specified as £51.6 million on the rental fleet. This compared with £61 million net cash from operations, down from £81 million. Dividends were maintained, with a relatively lower cash need of around £15 million.

Vp’s 10-year record is not much to write home about

One reason you could say that I was caught out advocating Vp as a “buy” previously, is the company not demonstrating over time that it offers any meaningful growth – despite meaningful value-accretive acquisitions.

Vp - financial summary

Year-end 31 March

Source: historic Company REFS and company accounts

In due respect, return on capital achieved double digits in four years and operating margins in six. Yet buying the shares now is essentially to trust that a new CEO can mean-revert performance rather than deliver long-term growth.

Alice Woodwark was managing director of the public sector Communities division of MITIE Group (LSE:MTO), and before that held senior positions at Compass Group (LSE:CPG).

Are the valuation and yield attractive or beguiling?

With expectations for the current financial year affirmed, the forward price/earnings (PE) ratio is 8.7x the March 2027 outcome, easing slightly to 8.5x if consensus for 2028 is realistic. On the face of it, a PE-to-growth (PEG) ratio of 0.2 is exceptionally attractive when it is hard to find qualifying shares below the 1.0% threshold for attractiveness. But PEGs properly apply to established growth shares rather than taking a snapshot view of cyclicals on the rebound.

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Given a 39.5p per share dividend since the 2025 year is expected to be held throughout, the prospective yield is 7.5% with around 1.6x cover.

It is as if the market does not trust these forecasts, heeding an adage about how among the worst investments are cyclicals looking cheap ahead of a downturn.

But considering Vp serves some relatively “defensive” industries, and if the IMF’s view of 2027 is fair, the shares probably offer value.

Three directors bought materially ahead of the update

In what seems a close timeframe, Vp’s chairman bought £49.4k worth of shares near 494p on 30 September. Another non-executive director bought a maiden £28.1k worth at 503p on 5 October. But most significantly the CEO, who joined in February, bought a maiden £200k worth, also around 503p.

The timing by the CEO is particularly interesting given she has settled in and should fully understand the business, what fresh actions are underway and their prospects in current market conditions. What we do not know is whether a lumpy buy relates to some clause in her contract like the CEO of B&M European Value Retail (LSE:BME), where a profit warning followed months after very substantial buying, although those shares have risen 70% since last May.

In due respect, I concur with “buy” at 528p, the shares continuing to rise this morning. If the new CEO’s judgment is fair and she takes the right actions, then Vp’s rating is over-cautious.

Edmond Jackson is a freelance contributor and not a direct employee of interactive investor.