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Questor: competition inquiry could be bad for VP, so we must reluctantly pull the plug
Questor share tip: trading at the hire specialist looks fine – but the regulator’s investigation into price fixing could prove damaging
April began with a pleasing update from VP, the equipment rental hire specialist first tipped here in January at 977p, but news of an investigation into the company by the Competition and Markets Authority (CMA) erased any warm glow just a day later.
That leaves us with a dilemma. The shares look cheap and underlying trading seems solid, but the CMA’s investigation into possible price fixing at the rented groundworks operations raises questions over future pricing trends (and thus profitability), the prospect of a fine and the risk of reputational damage.
This column’s last brush with the CMA, over funeral services operator Dignity, did not go well – and it may therefore be better to be safe than sorry and reluctantly move on from VP, with a view to revisiting it after the inquiry is over.
This is a bit frustrating, as the trading statement read well enough. To confound the doubters, the operations in Britain have seen steady demand across housebuilding, infrastructure and construction, while Asia has performed well and the integration of Brandon Hire has gone smoothly.
The only real blot was a weak showing at its offshore oil and gas business, Airpac Bukom, and even here the latest surge in the price of crude could yet offer some help.
But the CMA’s investigation does cast a cloud, especially as the regulator appears to be more combative than before. VP has £15m of cash in the bank and a low overall level of net debt, so paying any one-off fine should not be a problem, even if the loss of such precious liquidity would be mourned.
The prospect of reputational damage in the longer term is of greater concern so it may be best to sit this one out until the regulator’s work is done and its conclusions made public.
Although pulling the plug on VP locks in an unwelcome loss, it may be best to take a safety-first approach.
Questor says: sell
Ticker: VP.
Share price at close: 790p
Update: Saga
In the spirit of spring cleaning the portfolio, it is not just VP that is to be swept out. Questor’s patience with Saga, the insurance and travel services firm tipped in April 2017, is finally at an end after the one-two punch of a weak set of full-year results and a dividend cut earlier this month.
This regrettably locks in another dreadful loss, for which this column can only apologise, as the thesis that growth in cruise ships would compensate for tougher trading in insurance (and support the dividend in the process) has been holed below the water line.
While travel has delivered as expected, insurance broking has proved the problem, thanks to changes in how policies are renewed (in the face of pressure from the Financial Conduct Authority) and prices set. A switch to a new three-year fixed-price model exposes Saga if claims start to pick up, if nothing else.
The collapse of the share price does mean that the shares can be described as cheap, even after some swingeing cuts to profit and dividend forecasts, with a forward price-to-earnings ratio near 7 and a yield of nearly 7pc for the year to January 2020.
But this assumes that the forecasts are reliable, and after two big profit warnings that unfortunately cannot be taken for granted. Time to admit that we got this one badly wrong and move on. Hopefully tax losses carried forward can be put to good use.
Questor says: sell
Ticker: SAGA
Share price at close: 59.55p
- Read Questor’s rules of investment before you follow our tips
Update: Walker Greenbank
A wicked share-price slide had started to suggest that this column had also blundered in its recommendation of Walker Greenbank, the luxury wallpaper and fabrics maker – but the full-year results on April 10 were no worse than expected, and the outlook statement featured no nasty surprises either.
The company has strong brands, and new chief executive Lisa Montague’s strategy is to maximise their value by focusing on international markets and licensing.
Meanwhile the very modest net debt of £1.5m (albeit with a £10m pension deficit on top) and a 4.5pc yield (even after last year’s cut in the dividend) mean we can still afford to be patient.
Potential for a turnaround remains here, so hold on.
Questor says: hold
Ticker: WGB
Share price at close: 71.5p
Russ Mould is investment director at AJ Bell, the stockbroker. For the best of the Telegraph's investment analysis, advice and expert opinion, sign up to our weekly newsletter.