It’s been a couple of years since I last covered equipment rental company and small-cap stock VP (LSE: VP). Back then, I decided not to buy the stock because of concerns about the company’s high level of borrowings. However, I’d buy shares in VP now.
Why I’d buy this small-cap stock now
Today’s full-year results report sets out strong progress with debt reduction. The company used incoming cash flow in the period to pay off a big chunk of its borrowings. And on 31 March, net debt had fallen by around 24% compared to a year earlier, to just under £122m.
That’s still a thumping pile of other people’s money, but I reckon VP will continue to work at paying it down. However, one of the risks with the stock is the underlying cyclicality of operations. If there’s another general economic downturn, big borrowings could become a problem. That’s why I like to see cyclical firms getting into a strong financial position when trading is booming. And, right now, the outlook for the business is bullish.
If VP keeps paying off debt year after year until it’s gone, it can then direct its cash flow straight to reinvesting in equipment. When, and if, that happens, the business will probably be in great shape. And the good news is the financial record shows an improving trend now.
There’s also been a conclusion to the Competition and Markets Authority’s long-running investigation. The bottom line is VP must pay a penalty of £11.2m after a breach of competition law involving three “major” suppliers of groundworks hire equipment.
VP reckons it “fundamentally” disagrees with the CMA’s conclusions but the directors have decided not to fight the findings. In that way, the company and its shareholders will be spared further costs and uncertainty. I reckon that’s a good decision because the process has been dragging on for around four years.
Trading well and a positive outlook
The business is trading well. And looking ahead, the directors reckon the market backdrop for VP is “positive”. Major infrastructure sectors, such as water, rail and transmission are “primed for escalating growth in the coming year.”
I think the recovery we’ve been seeing in the building and construction sectors is encouraging. And there’s a potential tailwind for VP from the government’s drive to “build back better” following the pandemic. It’s hard for me to imagine anything other than booming demand for rental equipment in the years ahead. Although I could be wrong in that assessment and lose money with VP’s shares.
Nevertheless, chief executive Neil Stothard said in today’s report the management team is “excited” about the prospects for the business in the coming year. And I’d embrace the cyclical and other risks and buy the small-cap stock now as part of a diversified portfolio.
With the share price near 865p, the forward-looking earnings multiple is around 13 for the current trading year to March 2022. And the anticipated dividend yield is about 3.7%. I reckon that valuation looks undemanding.
