German Grid Upgrades And AMP8 Risks May Depress Returns Before Prospects Eventually Improve

Catalysts

About Vp

Vp is a specialist equipment rental group focused on infrastructure, construction, housebuilding and energy markets in the U.K. and internationally.

What are the underlying business or industry changes driving this perspective?

• Although multiyear electricity Transmission upgrades in Germany provide a long duration revenue opportunity, execution risk, capital intensity and potential project slippage could limit the conversion of this demand into sustained earnings growth and pressure net margins.
• While the U.K. AMP8 Water investment cycle is materially larger than AMP7 and closely aligned with Vp specialist capabilities, delays in contractor mobilisation, regulatory interventions or scope reprioritisation could push back expected volume growth and defer the anticipated uplift in group revenues and returns.
• Although infrastructure spend in Transmission, Water and Rail is structurally supportive, any prolonged weakness in U.K. macro conditions or government-led reprioritisation of capital programmes could mute asset utilisation and keep group ROCE below historical levels.
• While the restructuring of Brandon Hire Station is designed to refocus on higher returning B2B customers and improve profitability, execution missteps, customer churn or larger than anticipated cost leakage could erode the forecast EBIT benefits and slow recovery in net margins.
• Although digital investments such as pricing tools and cloud adoption should enhance efficiency and pricing discipline over time, rising technology and payroll costs combined with slower top line growth could mean that the margin benefits are diluted, delaying meaningful improvement in earnings.

Assumptions

This narrative explores a more pessimistic perspective on Vp compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts. How have these above catalysts been quantified?

• The bearish analysts are assuming Vp's revenue will remain fairly flat over the next 3 years.
• The bearish analysts assume that profit margins will increase from 2.1% today to 9.9% in 3 years time.
• The bearish analysts expect earnings to reach £38.0 million (and earnings per share of £0.93) by about December 2028, up from £8.0 million today. However, there is some disagreement amongst the analysts with the more bullish ones expecting earnings as high as £47.2 million.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 10.0x on those 2028 earnings, down from 25.7x today. This future PE is lower than the current PE for the GB Trade Distributors industry at 14.8x.
• The bearish analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 11.37%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• Persistent structural weakness in U.K. General Construction and Energy, including lower volumes and delayed oil and gas projects, could offset long term Infrastructure tailwinds and keep group revenue growth subdued.
• The Brandon Hire Station restructuring, which relies on large branch closures, a 40% reduction in asset net book value and a four year cash payback, may fail to deliver the planned uplift in returns, leaving net margins and earnings below expectations.
• Rising structural cost pressures from higher national insurance, minimum wage and ongoing technology and digital investments could structurally compress profitability if pricing power and volume recovery lag, limiting future net margin expansion.
• The multidecade German grid upgrade and enlarged AMP8 Water program may experience regulatory delays, contractor bottlenecks or political reprioritisation, which would defer expected ramp up in Infrastructure activity and slow revenue and earnings growth.
• Higher net debt, a gearing ratio drifting toward the top of management’s comfort band and continued dividend commitments could constrain future fleet and M&A investment, limiting Vp ability to fully exploit long term growth opportunities and thereby weighing on earnings growth.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The assumed bearish price target for Vp is £7.0, which represents up to two standard deviations below the consensus price target of £8.28. This valuation is based on what can be assumed as the expectations of Vp's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of £10.0, and the most bearish reporting a price target of just £7.0.
  
• In order for you to agree with the more bearish analyst cohort, you'd need to believe that by 2028, revenues will be £382.8 million, earnings will come to £38.0 million, and it would be trading on a PE ratio of 10.0x, assuming you use a discount rate of 11.4%.
  
• Given the current share price of £5.2, the analyst price target of £7.0 is 25.7% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.