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Should I pile into this share, up 10% on today’s results?

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Equipment rental specialist VP  (LSE: VP) jumped more than 10% higher in early trading today on the release of the firm’s full-year results report.

I often pay attention to rapid share-price rises, especially when a stock has previously been weak, as in the case of VP. The sudden movement can mark a reversal or improvement in a company’s fortunes, and can also indicate an opportune moment to think about investing in a company’s shares.

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Reduced uncertainty and a relief rally

VP had fallen almost 45% since the summer of 2018 and it plunged 33% between April and May 2019 alone. The catalyst appears to have been the release of news that the Competition and Markets Authority (CMA) had provisionally found suspected anti-competitive conduct relating to the supply of groundworks products for hire in the UK. VP is active in that area with its Groundforce business and is, of course, co-operating fully with the investigation.

In today’s report, chairman Jeremy Pilkington explained that the CMA had reached a provisional determination that VP and two other companies, had “acted in a manner deemed to be uncompetitive in the market for certain elements of temporary groundworks.”  The firm is reviewing the alleged breaches and Pilkington expects it to be in a position to respond to the CMA “shortly.” 

Meanwhile, today we learn that a £4.5m exceptional cost provision has been made in the accounts relating to the issue, which the firm describes as “the arithmetic midpoint of a range of possible outcome of between £0 to £9m calculated based upon previous cases.”  There is no admission of culpability at this stage, but I reckon quantifying the potential financial loss goes a long way towards removing the uncertainty. Indeed, we could be seeing something of a relief rally in the shares today.

Growth on track and something to fret about

The figures are good. Revenue came in 26% higher compared to the year before and adjusted earnings per share rose 12%. The directors expressed their ongoing confidence in the outlook by lifting the total dividend by 16%. Apart from the CMA investigation into part of the firm’s operations, things have been going well. On top of organic growth, VP acquired Sandhurst Limited for just under £3.3m on 10 May to bolt on to existing operations, suggesting that the growth agenda remains on track.

Looking forward, chief executive Neil Stothard said in the report that he thinks the firm’s main markets in the UK will continue to be supportive, albeit with “slightly slower” growth than previously because of “political and economic uncertainty.” Around 97% of the adjusted operating profit came from the UK during the year with the rest from international operations, so the home market dominates the accounts.

The valuation looks undemanding at first glance with a forward-looking earnings multiple of around eight for the trading year to March 2020 and a dividend yield of 3.9% covered more than three times by anticipated earnings. However, VP carries big borrowings with net debt running almost five times the level of operating profits. I think that’s too high and could become problematic in any future cyclical downturn. So I’m not piling into the shares on this occasion.

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Kevin Godbold has no position in any share mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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