UK Edition
Questor: as Brexit uncertainty peaks, buy this sturdy equipment rental company at a low valuation
Questor share tip: VP Group has stable management and robust finances, and despite a recent rise in the dividend trades at just 10 times earnings
If the “meaningful vote” on Brexit goes ahead as planned today, this is a rather difficult time to be writing a column on the London stock market.
If a no-deal, hard Brexit looks more likely after the vote, it will be logical to expect sterling to stumble and the share prices of overseas earners, such as miners, oil firms and multinationals such as Burberry and Diageo, to benefit (or at least do less badly).
If there are signs that a deal is possible, sterling may rally. In that case, the more domestically focused ranks of the FTSE 250 and FTSE SmallCap indices may do better, alongside sectors such as banks and housebuilders that make most of their income in Britain.
No one knows what the outcome will be or what it may mean. But we can say with some degree of conviction that a no-deal is more priced into stock market valuations than a softer alternative; we do that just by looking at how share prices have done and how valuations have come down across the relevant stocks and sectors in the past few months.
As a result, this column is more inclined to nose around for ideas among downtrodden domestic plays if their management is capable and the company has a strong competitive position, sound cash flows and a decent valuation.
VP Group, the equipment rental specialist, appears to fit the bill.
The chairman, Jeremy Pilkington, has been on the board for nearly 40 years and the chief executive, Neil Stothard, for more than 20. The firm derives around 90pc of its sales from Britain, where its main markets are the maintenance and upgrade of rail, transmission and water infrastructure. VP provides the equipment without which much of this work cannot be done.
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The acquisition of a rival, Brandon Hire, brought exposure to housebuilding, where activity levels remain helpful too.
A return on capital figure of around 10pc based on year-end results is a bit deceptive, as VP has been adding to its fleet. Capital investment has also been running well ahead of depreciation, which explains why the cash conversion ratio is low, and investors need not be concerned about the company’s financial strength: net debt is relatively modest and operating profits plus interest income covered interest expenses by more than 10 times last year.
The shares have fallen by around 20pc from their highs, and that puts them on a forward price-to-earnings ratio of barely 10 with a forecast yield of 3.1pc, where the dividend is three times covered by earnings.
November’s interims offered a positive picture, as suggested by a 21pc increase in the interim dividend.
Even if readers would prefer to sit things out before and in the immediate aftermath of the meaningful vote, VP is a name to research and note in the event of any wider stock market volatility. This is a well-run, well-positioned business that appears to come at an attractive price.
Questor says: buy
Ticker: VP.
Share price at close: 964p
Update: Nichols
Our analysis of Nichols, the Aim-quoted soft drinks maker, has yet to fully prove itself, as the shares are down a fraction from our entry price of a year ago, but last week’s full-year trading update suggested that investors’ patience could yet be rewarded.
Sales grew by 7pc year on year, as UK revenues fizzed higher by 13pc. Although international sales fell by 12pc, Africa performed strongly and results from the Middle East were no worse than expected in light of the conflict in Yemen, a dreadful situation that has held back overall performance since a profit warning in late 2017.
Best of all, management said full-year profits would be “at least in line with market expectations”, an upgrade from “in line” in November.
We can now await the full-year results on Feb 27, when another increase in the annual dividend payment seems likely.
Margins are high and the balance sheet has net cash. If earnings momentum starts to build again, patient holders could benefit.
Questor says: hold
Ticker: NICL
Share price at close: £15.52½
- Questor archive: telegraph.co.uk/questor