Chart breakout at Vp

Vp likes keeping the analysts busy. Celebrating its 60th anniversary this year, the equipment rental company has beaten forecasts regularly in recent times, and earnings upgrades have followed. And it's done it again. Full-year results easily exceeded expectations and the house broker has nudged up profit estimates. With management in bullish mood, the earnings upgrade cycle could have further to run.

In what was a record year, a 200 basis point increase in margins to 13% meant underlying pre-tax profit surged by one-third to £26.8 million - that smashed the previous best of £21.7 million in 2009 - on revenue up 12% to £205.6 million. Planned investment in the business will likely slow margin growth over the next few years, we're told, but an increase in return on capital from 13.5% to 16% is impressive.

"The economic environment in both the UK and globally is more positive than for some time and all group business divisions are identifying significant growth and investment opportunities for the near and long term future," says chairman Jeremy Pilkington.

Clearly, the election outcome and the certainty it brings is good for business. Government plans to invest over £460 billion into UK infrastructure are unchanged, and the housebuilding boom shows few signs of slowing.

Small tools rental operation Hill Station turned over £77 million, a record, and made an underlying operating profit of £8.7 million, up 81%. UK Forks, which hires out rough terrain material handling equipment made £4 million, a 62% increase, and demand from housebuilders and the water industry drove profit at the Groundforce excavation equipment division up 13% to £8.9 million.

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Even Airpac Bukom, which supplies the oil industry, grew profit by 40% to £2.8 million, despite the slump in oil prices and subsequent check on industry capex. "The long term view is that this is still a good place to be," Pilkington told Interactive Investor.

House broker N+1 Singer predicts a drop in Airpac profit this year back to 2014 levels at £2 million. But because Airpac makes up just 10% of Vp's business, group earnings are tipped to grow by mid-single digits for at least the next three years.

Vp shares are up by a quarter since a positive update in February, but are only back to levels last seen in the summer. At 716p, the shares trade on 13.5 times earnings estimates for the year to March 2016, dropping to 12.8 times the year after.

"To our mind, Vp's rating continues to look attractive both in isolation (considering the current upgrade momentum) and relative to peers," says James Tetley at N+1 Singer. "On a 12 month view, we see no reason why the shares should not trade on c.14x FY17 EPS, which would imply fair value in the region of 785p."

A chart breakout above resistance at 690p (see chart) should create solid support at that level going forward.

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