Small Cap Value Report (Tues 30 Nov 2021) - TET, TPT, SYS1, VP., HRN

Good morning! It's Jack & Roland here with the SCVR for Tuesday.

Agenda -

Jack's section:

Treatt (LON:TET) - strong results and resilient performance from a proven quality operator. Ongoing investment for future growth, with increasingly high margin and diversified revenue. The company could continue to do very well in the long term, but for now the valuation remains full so it stays on the watchlist.

System1 (LON:SYS1) - I hold - very illiquid micro cap, hard to sell out once you buy in. But there is an intriguing growth story here, shifting away from bespoke one-off consultancy contracts to a far more scalable suite of data products for advertisers. If the strategy works out, then the growing proprietary database could become a moat and System1 could become quite valuable. The small size and lack of liquidity mean it's not suitable for everyone though.

Hornby (LON:HRN) - owns brands like Airfix and Scalextric, which could have value if the company continues along its current course of investment in people and tooling. Supply chain disruption is obscuring signs of progress but the order book is up 35%. I still think a valuation of £65m does not fully reflect the risks here though.

Roland's section:

Topps Tiles (LON:TPT) - a solid set of results which take trading back to pre-pandemic levels. The stock also offers a useful 5% dividend yield. However, the outlook sounds cautious and I feel that growth potential over the next few years could be limited.

Vp (LON:VP.) - I’m impressed by today’s numbers and the underlying business, which shows some real hallmarks of quality in my view. Market conditions appear somewhat mixed, but VP’s experience management seems to be executing well. A 25% increase to the interim dividend will reward patient long-term shareholders.

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Explanatory notes -

A quick reminder that we don’t recommend any stocks. We aim to review trading updates & results of the day and offer our opinions on them as possible candidates for further research if they interest you. Our opinions will sometimes turn out to be right, and sometimes wrong, because it's anybody's guess what direction market sentiment will take & nobody can predict the future with certainty. We are analysing the company fundamentals, not trying to predict market sentiment.

We stick to companies that have issued news on the day, with market caps up to about £700m. We avoid the smallest, and most speculative companies, and also avoid a few specialist sectors (e.g. natural resources, pharma/biotech).

A key assumption is that readers DYOR (do your own research), and make your own investment decisions. Reader comments are welcomed - please be civil, rational, and include the company name/ticker, otherwise people won't necessarily know what company you are referring to.

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Jack’s section

Treatt (LON:TET)

Share price: 1,120p (pre-open)

Shares in issue: 59,768,648

Market cap: £669.4m

Treatt manufactures and supplies ingredient solutions for the flavour, fragrance, beverage and consumer product industries. Its revenue is diversified across a number of segments and geographies, and the mix is shifting towards higher margin products. Meanwhile, the company continues to invest in future growth and generates attractive, double-digit returns on capital.

It’s a resilient and high quality enterprise delivering integrated solutions for the food, beverage and fragrance industries across the globe. And Treatt has proven itself to be a great investment over time. It remains a high Quality-Momentum stock, although the valuation now looks rich.

Still, this has been one of those stocks where you wait for it to become cheap at your peril. Highly-rated quality stocks do need to generate earnings growth though, otherwise a derating to an ex-growth multiple becomes a risk.

Full year results

Highlights:

• Revenue +14% to £124.3m,
• Gross profit +32.5% to £42.2m, gross margin up from 29.2% to 34%,
• Profit before tax and exceptionals +41.3% to £20.9m,
• Adjusted basic earnings per share +37.2% to 27.05p,
• Total dividend per share +25% to 7.5p,
• Adjusted return on capital employed up from 18.6% to 20.9%.

Revenue growth has been seen across ‘multiple addressable markets’, with a consequent notable improvement in profit margins. Almost 80% of group revenue is now from higher margin natural and clean-label products.

The increase in margins results from the combined effect of growth in higher margin healthier living categories, coupled with improved citrus margins ‘as the increased sophistication within our citrus category begins to show through’.

Tea led the way with growth of 113.1% as a result of some significant new business wins across a range of alcoholic and non-alcoholic beverages (in particular new wins in the ready-to-drink canned cocktail market).

Health & wellness (which includes sugar reduction) had another very strong year with revenue growth of 28.7%. This was driven by increased demand from brand owners to reduce the sugar content in their beverages and from flavour companies using Treatt’s products as part of their formulations, reflecting ‘the important IP, know-how and technical expertise which Treatt possesses in this field’.

The fruit & vegetables category had one of its strongest years to date, with growth of 59.6%. Citrus remained the group’s largest product category representing 43.6% (2020: 50.3%) of sales, with revenue falling by 1.2% due to the timing of deliveries and contract mix with some large customers.

Revenue is also nicely diversified by geography, with the USA accounting for 43%, Rest of world 13%, Rest of Europe 11%, UK 8%, Rest of Americas 8%, China 6%, Ireland 6%, and Germany 5%. China remains a significant opportunity that management is targeting (sales here rose by 7.6% to £7.4m in the year).

Meanwhile there has been no significant disruption to operations due to supply chain issues, and Treatt continues to invest for future growth.

Initiatives include:

• Phase one installation and commissioning of plant and machinery (due to be complete mid-2022), and
• Phase two transfer of manufacturing equipment from old facility (due to be completed by mid-2023).

The group expects continued strong growth in revenue, with reversion to normal H1 / H2 split in the new financial year.

New markets and product development is a feature of the company:

As we continue to solidify our position as a key supplier to a number of the largest beverage operators, a key win for Treatt has been the swift evolution of the ready-to-drink canned cocktail market, where we have a strong position with multiple leading brands. The rapid innovation of new flavours in that space is testament both to our impressive ability to respond to new consumer trends, and to our strong supply chain relationships.

Balance sheet - Shareholders' funds grew in the year by £15.2m to £106.3m (2020: £91.1m), with net assets per share increasing by 16.4% to £1.76 (2020: £1.51). Over the last five years net assets per share have grown by 148%. All the group's land and buildings are held at historical cost, net of depreciation, on the balance sheet.

The group has gone from net cash to net debt of £9.1m, still very manageable, as a result of investment in infrastructure, while the pension liability has fallen from £8.1m to £5.1m due to good investment returns.

Commenting on the results, CEO Daemmon Reeve said:

We are making the right investments at the right time on our growth journey. I have no doubt that the combined effect of increasing our investment in R&D, realising the multitude of benefits from the new UK headquarters and strengthening our team will elevate Treatt to a new level with further sustained benefits to all of our stakeholders.

Outlook

The Group continues to go from strength to strength. We have a solid business model, a clear strategy and exciting opportunities as markets reopen, new trends emerge, and we enter new territories. As we begin saying goodbye to Northern Way, the home that has served us well for nearly half a century in the UK, we are excited about the continued transition into our new UK Headquarters in Skyliner Way, which has been designed to be both environmentally efficient and to support the wellbeing of our employees. I'm confident that we have all the right elements in place to build on our remarkable track record of growth. The resilience we have shown in achieving such positive results demonstrates that we are well positioned to deliver on our ambitions.

Conclusion

Treatt continues to come across as an excellent company with above-average prospects for long term, profitable growth. With adjusted EPS growth of around 37% and ongoing margin expansion, you could argue that a 39.6x forecast PE ratio is just about deserved - but it’s still a large premium to pay.

One that continues to prevent me from buying, although, clearly, I should have paid up a long time ago. Looking at the chart, the StockRanks have actually called this one quite well over the past five years or so.

The strong financial performance over the last year follows an unbroken run of eight years of growth in profit before tax and exceptional items and exceeds management’s initial expectations.

This is particularly impressive given that many of Treatt’s markets remained impacted by the pandemic. To achieve this without any government support or furlough savings suggests a highly resilient business.

It is aligned with growing consumer trends such as ready-to-drink cocktails, and continues to invest for future growth. China is a notable opportunity. But, for now, I do come back to the valuation, particularly since the earnings multiple has expanded in recent years. Treatt is more expensive than it once was, which could be a drag on capital returns in the short to medium term.

Should that valuation moderate at any point, then Treatt is near the top of the list as a high quality company with sound long term growth prospects.

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System1 (LON:SYS1)

Share price: 320p (+3.23%)

Shares in issue: 12,898,296

Market cap: £41.3m

(I hold)

This is an interesting recovery/growth prospect, but not one without risk. System1 was previously known as BrainJuicer and is part way through a strategic shift away from lumpier advertising consultancy revenue towards higher volume and more automated (and scalable) advertising data solutions. These solutions help customers create more effective adverts.

I’ve built a small position to keep an eye on it - as I said, an intriguing story - but this industry is full of talented storytellers.

There’s a risk that the digital product doesn’t take as well as management expects, and the stock’s status as a Speculative Micro Cap is well earned. There’s a real lack of liquidity here, which makes buying and selling tricky. The related share price volatility must also be considered.

There are a couple of additional issues. Looking at the most recent annual report, five executive directors were paid a combined £978,109 in remuneration, so nearly 2.5% of the company’s market cap paid out each year to the executive team.

Most recently, news of a potential trademark infringement is not ideal (although System1 is the accuser and not the accused). Before that, though, the group noted an ‘administrative oversight’ at its AGM and the group’s options plans have been subject to shifting targets.

These might all have perfectly reasonable explanations but, at the smaller end of the spectrum, quality of management and potential agency conflicts become key investment factors. On that note, the group’s founder John Kearon does still own nearly 23% of the company, so there is alignment with shareholders.

Interim results

Highlights:

• Revenue +22% to £12.4m,
• Gross profit +21% to £10.4m, gross margin down from 85% to 84%,
• Adjusted profit before tax +252% to £1.3m,
• Diluted earnings per share up from 1p to 8.8p.

Data products now account for 36% of revenue, having increased from nothing in the first half of last year to 46% of revenue in Q2 of the current financial year.

The group has £7.5m of net cash - a useful amount given the c£40m market cap. Share buybacks to commence in December.

There’s been a £0.2m charge in connection with the IP litigation case. Let’s hope costs there don’t spiral.

Commenting on the Company's results, John Kearon, Founder and Executive President, said:

We believe that the growth in data revenues signals tangible progress towards our strategic goals, and that these revenues will in due course more than offset the expected reduction in bespoke consultancy projects as more companies adopt our automated data products.

Under “Growing our Asset and Fame” there is this paragraph:

Earlier this month we launched our Chief Innovation Officer Orlando Wood's latest book on advertising effectiveness, Look out., which was published by the Institute of Practitioners in Advertising. Look out. argues that to create effective and memorable advertising that builds brands, the advertising industry must capture the 'broad-beam' attention of audiences; to achieve this the industry must shift its attentional plane-it must look out. The new book explains the behavioural science that underpins the methodology behind Test Your Ad and has been hailed by CMOs and advertising industry leaders.

Maybe I’m being skeptical here, but I don’t really see how this is materially important to shareholders or the company’s prospects. Perhaps I am missing the significance of this book. You can buy it for £55 on Amazon if you’re interested, but there are currently no reviews.

I only dwell on this because writing a book is really hard work - congratulations to Orlando Wood, of course - but all that time spent writing a book was time not spent by the chief innovation officer on directly improving business results.

I’ll leave that thought there for now and shift my ‘attentional plane’ back to the financial results, but, when I consider it alongside the executive remuneration (Wood is not included in that list, so we do not know his salary), I do have a couple of reservations.

For now I'll give it the benefit of the doubt. The results are positive and the company intends to buy back shares. Data is a growing proportion of revenue, so the plan is so far on track.

Intellectual property litigation

On 27 September 2021, our US and UK subsidiaries, System1 Research Inc. and System1 Research Limited, filed a complaint for trademark infringement, unfair competition, and deceptive trade practices at the United States District Court for the Southern District of New York against System1 LLC over their infringing use of the mark "SYSTEM1". The Company is being advised in this matter by Norton Rose Fulbright, an international law firm. System1 LLC continues to use the "SYSTEM1" name and mark and has announced that it proposes to expand such use by becoming a NYSE-listed company through a business combination with Trebia Acquisition Corp.

IP litigation costs related to this case are excluded from adjusted operating costs (£9.1m) and have been recognised in the statutory operating costs (£9.2m).

The Board believes that the Company's case against the Opposing Party is compelling and will issue further updates in due course.

Buybacks

As previously indicated, we will initiate a share buyback programme from December 2021 to repurchase shares over an extended period, in order to enhance shareholder returns and to satisfy obligations in relation to employee share schemes. Shares will be repurchased via ongoing on-market purchases. The relative illiquidity of System1's shares makes it difficult to predict the level and speed of uptake, and the board will formally review the effectiveness of the buyback programme at the end of the current financial year.

Outlook

The rapid adoption of our automated data products by existing and new customers in the first half of the year augurs well for the future of our platform strategy and is expected to be partially offset in the near term by the continuing reduction in our legacy bespoke consultancy assignments that previously formed the core of our historic BrainJuicer business. Focussed investment in people and the platform will continue for the rest of the year, which we believe will enable future accelerated growth.

Balance sheet - looks strong, with £10m of cash (up from £9m) set against £6.6m of current liabilities. Net tangible asset value is about £8m. The group is cash generative, too, with net cash from operations of £1.88m and free cash flow of £1.75m.

Conclusion

System1 aims to become ‘the world's marketing decision making platform’, which is a lofty and lucrative goal. So far, the data solutions do seem to be finding a home but it is still early days in the strategy.

It aims to use its ‘world-beating’ prediction and improvement methodologies to add value for customers, and will reinvest the proceeds of this added value back into its product. Such a strategy could lead to moat-like characteristics and high returns on capital, but this focus in the short term will come at the expense of declining revenue in its legacy bespoke consultancy projects.

The growth in data revenues is encouraging, possibly helped by partnerships with LinkedIn and ITV, and there is a recovery/transformation angle to the shares. Even after the rise in market cap, there’s value on offer given the net cash position. And the core business of testing adverts could genuinely become very attractive.

If it can prove itself as a scalable data business with recurring revenue streams and high margins, then the shares could compound in value over time.

That’s the ‘reward’ side. The risks remain that the strategy might not live up to the rhetoric or the consultancy business might fall at a faster rate than data grows in the short term. There is also the general point of micro cap illiquidity, which is very much the case here. If you do buy in, you might find it hard to sell. So any disappointments (and there have been disappointments) could lead to steep drops.

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Hornby (LON:HRN)

Share price: 38.06p (-8.29%)

Shares in issue: 166,927,838

Market cap: £63.5m

Hornby’s in turnaround mode, with deep value specialist Phoenix Asset Management holding nearly three quarters of the stock, so they are calling the shots here.

The company itself owns some nostalgia-inducing heritage brands that could have value: things like Scalextric, Hornby trains, and Airfix. While these brands are recognisable, I also feel as though that brand recognition might have seen Hornby’s share price get ahead of itself at points, given the historical levels of revenue and profits, and where the company is in its recovery.

At its highs around the turn of the year, the group was valued at £119m on trailing twelve month revenue of £43m and a modest TTM net loss. The situation has since become more favourable: a market cap today of £64m on FY21 revenue of £48.5m and £1.4m of net profit.

That still factors in a fair amount of goodwill and growth in my view, although trends have been improving thanks to a number of self-help initiatives.

Half-year report

Highlights:

• Group revenue +3% to £21.8m,
• Operating loss before tax and exceptionals of £0.3m (2020: profit of £0.2m), due to the shortage of supply of containers and freight drivers,
• Statutory loss before tax of £0.7m (2020: profit of £17,000),
• Basic loss per share of 0.45p,
• Net cash £0.2m (2020: Net cash £4.0m).

Lyndon Davies, Hornby Chief Executive, commented:

Container shipping costs have soared, requiring us to raise our selling prices in August to cover this. Shipping times from our overseas factories have nearly doubled to circa 70 days, whereas pre-covid this was around 35-40 days. We have now taken the pain for those lost sales.

Demand for our products is higher than ever, therefore it is disappointing to have experienced the supply chain problems which seem to be easing but remain volatile. We are heading into our key Christmas trading period and right now it is hard to tell what the outcome will be for the full year results. However, we are as well placed as we can be with our order book 35% higher than it was a year ago.

An uncertain near term outlook due to events beyond the company’s control unfortunately, although the increased order book is a positive. Hornby received 119 containers in the period, with an additional shipping cost of £10,000-£12,000 each.

The group’s CEO gives a useful breakdown of the difficulties in getting finished products to its UK and US warehouses:

• Empty container supplies are now better, but unstable, so affecting shipment plans.
• Delays of processing containers: insufficient time for loading due to container availability, delays in containers returning to dock, extra cost for containers being kept in holding area, delayed documents.
• Suppliers have also faced several issues: labour shortages, power cuts, and increasing material prices and lead times.

Hornby is currently working with suppliers to plan the best schedules from now until the 1st of February.

Balance sheet - cash down from £4m to £1.2m, current assets of £28m set against current liabilities of £9.8m. Net tangible assets of £30.6m. Pretty good actually, although the company will want to get back to positive cash generation quickly.

Conclusion

It’s a shame this turnaround coincides with Covid and supply chain disruption, which obscure the underlying progress.

The unbalanced share structure is not ideal. The top two investors own more than 90% of the company and hold a lot of power. You’re either ok with that dynamic or you are not, it is a risk.

Net cash has come down as Hornby continues to invest in its workforce and tooling equipment. It sounds as though management is taking sensible steps to revitalise business, and Phoenix is a supportive shareholder / loan provider.

How much demand is there for the group’s products? I find that hard to quantify right now, and it’s important as the company needs to drive revenue and margins if today’s share price is to be considered cheap in a few years’ time. Any views on the group’s products are always welcome.

These metrics need to get better, and in time, they might:

It’s still a question mark for me though. Things like Airfix are niche, hobbyist products that can command a loyal fanbase and, consequently, pricing power and good margins, so I’ll never completely rule Hornby out.

The share price momentum is fairly dire, resulting in a more modest valuation than when I last looked at the shares. Hornby doesn’t look like a bargain yet though, which is what I would be looking for given the risks and uncertainties.

Still, I remain of the view that it would be good to see these brands reclaim some of their former lustre.

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Roland’s Section

Topps Tiles (LON:TPT)

Share price: 62.6p (pre-open)

Shares in issue: 195.4m

Market cap: £123m

Annual results

“Record year of revenue for the group”

Today’s results from tile retailer Topps Tiles show a strong performance over the last year, with revenue and profit back to pre-Covid levels. I’m encouraged to see this recovery but I’m also aware that Topps was struggling before the pandemic - sales had been flat since 2015, while profits had fallen.

The five-year share price chart tells the story so far:

The question for me is whether today’s results signal a genuine return to growth for Topps - or whether the company has just benefited from the home improvement boom we’ve seen over the last year.

Let’s start with a look at the financial highlights.

Financial highlights

Topps’ financial year ended on 2 October. The company says this period included three months during which “homeowners” couldn’t enter stores. I assume from the careful wording that this means trade buyers could enter stores, while retail customers could click and collect or order online.

In contrast, the company’s FY20 results included a far more severe hit from the early lockdowns, so aren’t representative of normal trading.

I think it makes more sense to compare FY21 results with FY19, so I’ve included some comparatives from the pre-pandemic year.

• Revenue: £228m (FY20:+18%, FY19: +4%)
• Gross margin: 57.3% (FY20: 58.5%, FY19: 61.6%)
• Pre-tax profit: £14.3m (FY20: -£9.8m, FY19: £12.5m)
• Adjusted eps: 6.1p (FY20: 1.6p, FY19: 6.6p)
• Total dividend: 3.1p (FY20: 0p, FY19: 3.4p)

Topps can fairly claim to have returned to pre-pandemic levels of trading. The dividend has also been reinstated at 90% of 2019 levels - not a bad result, in my view.

Profitability: Topps’ gross profit margin has fallen steadily over the last three years. This tells us that the cost price of goods sold is accounting for a greater proportion of the sale price.

The company says today that the lower gross margin reflects “increased investment into value and higher shipping costs”. That’s another way of saying that Topps has been cutting prices to remain competitive and absorbing higher transport costs.

Looking further down the income statement, the picture improves somewhat. The pre-tax profit margin of 6.3% is ahead of the 5.7% reported in FY19.

Return on capital employed has also improved. Using the company’s adjusted figures, ROCE has improved from 13.1% in FY19 to 17.5% in FY21.

Despite higher costs, I think that Topps has maintained a stable and acceptable level of profitability over the last year.

Balance sheet: The company reports an adjusted net cash position of £27.8m at year end, compared to £26m in FY20 and net debt of £11m in FY19. This suggests cash generation has remained strong - the FY21 figures also include repayment of deferred VAT liabilities.

Topps’ net debt excludes lease liabilities on the company’s stores, which total around £110m. That’s a sizeable amount, but as long as the stores continue to trade profitably, I don’t see it as a big concern.

The group strengthened its balance sheet in 2020 with the sale and leaseback of its head office and central warehouse for £18.1m. A one-off gain - but a useful example of how freehold property can be useful in a tight situation.

Overall, Topps’ balance sheet seems fine to me.

Current trading & strategy

The near-term outlook seems a little mixed to me.

Topps says that trading so far in FY22 is 18.4% ahead of the two-year comparative (Oct/Nov 2019 and 0.7% below the one-year figure (Oct/Nov 2020).

However, the company warns of continued headwinds from “reduced consumer confidence, global supply chain challenges and cost inflation” (my bold).

The comment about consumer confidence is interesting - this seems to chime with the comments from sofa firm SCS last week that “consumers [are] spending less on big ticket discretionary purchases”.

Topps Tiles’ current strategy is to target “1 in 5 by 2025” - a 20% market share in “coverings, adhesives and grouts” by 2025. Management say this would be equivalent to annual sales of £250m.

I’m not sure if any of Topps’ current revenue is excluded from this goal, but given that revenue hit £228m last year, this seems quite a modest target to me. Hitting this goal would only represent a 10% increase in revenue (from FY21) over the next four years.

My view: Topps Tiles seems a decent retail operator and the company is making useful inroads into the trade market. But it’s a fairly competitive space and I’m not sure how much scope there is for growth within the UK market. I think this is probably already a quite mature business.

This view is mirrored in broker forecasts, which suggest revenue and profit growth will fall back to single-figure percentage gains over the coming year.

Topps shares look reasonably valued to me, on 10 times forecast earnings. There’s also a useful 5% dividend yield which looks well supported by cash flow.

I don’t see any reason to dislike this stock at current levels, but I’m wary about the group’s cautious outlook statement. On balance, my stance here is fairly neutral.

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Vp (LON:VP.)

Share price: 975p (08.45)

Shares in issue: 40.2m

Market cap: £377m

Interim results

“Current trading is positive and in line with Board expectations for the full year.”

Equipment hire companies listed on the London market have had a mixed track record in recent years. But I’ve consistently gained a strong impression of VP, which operates in a number of specialist niches, including telescopic handlers, excavation support, portable roadways and rail infrastructure plant.

Long-term shareholder returns have been impressive.

This progress has been helped by a complete lack of dilution. VP didn’t require a pandemic fundraising.

One reason for this consistent long-term performance might be the ownership structure. VP chairman Jeremy Pilkington owns 50% of VP and has been chairman since 1981. He was also CEO between 1981 and 2004.

I see that Paul had a favourable view of VP when he last covered the stock in June. Let’s see what’s happened since then.

Financial highlights: Today’s half-year results cover the six months to 30 September. The numbers suggest a decent recovery in trading, although revenue and profit are still below pre-Covid levels.

• Revenue: £176m (FY21: £142m, FY20: £186.6m)
• Adjusted pre-tax profit: £20.2m (FY21: £8.6m, FY20: £25.9m)
• Adjusted eps: 37.7p (FY21: 17.4p, FY20: 52.5p)
• Interim dividend: 10.5p (FY21: nil, FY20: 8.45p)

Revenue and profits appear to be heading back to pre-pandemic levels. Progress may have been constrained somewhat by wider market conditions. Although momentum is said to be strong across the infrastructure and construction markets, VP admits that cyclical factors and “localised supply chain constraints” are affecting some parts of its business.

Although the HS2 rail project remains a key market, VP says that the AMP7 (water) and CP6 (rail) infrastructure programmes have been somewhat delayed. This has had a knock-on effect on group activity, but volumes are expected to improve during the second half of the year.

Shareholders will welcome the 24% increase to the interim dividend. Chairman Jeremy Pilkington says that this corrects the historic drift in the dividend, which has moved away from the company’s policy of 2x cover.

Assuming the final payout is in line with broker forecasts, VP stock now offers a useful 3.4% forecast dividend yield.

Incidentally, VP has an excellent dividend history that I wasn’t aware of until today. Stockopedia data suggests that the company has not cut its payout since 1990 (except last year):

Capex - returning to (greener) growth: VP sees significant opportunities ahead and has ramped up capex after last year’s cuts.

• H1 FY20: £26.6m
• H1 FY21: £14.6m
• H1 FY22: £31.7m

The company says that current capital investment is increasingly focused on more eco-friendly solutions, such as solar power lighting (rail) and “significant substitution of equipment with battery / cordless models”.

VP has also resumed acquisitions, which have formed a part of the group’s growth over many years. The company acquired M&S Hire for £2.8m during the first half. This business is a specialist provider of access systems for interior fit outs and will be integrated into the group’s similar MEP Hire business. It sounds like a sensible bolt-on deal to me - no concerns here.

Balance sheet: VP’s insider ownership and lack of dilution suggests to me that the business is run with a sensible balance sheet. Today’s half-year results confirm this view for me. Net debt of £131.7m is in line with historic levels:

One useful way to look at debt levels for equipment hire businesses is to compare net debt with the value of the company’s fixed assets, as these largely represent the hire fleet.

VP’s property, plant and equipment is valued at £240m on today’s balance sheet. The group’s net debt represents just over half this value, which seems comfortable to me.

Profitability: Stockopedia data suggest VP’s operating margin and return on capital employed have both averaged about 10% since 2016:

Today’s results suggest a return to stronger historic levels of performance, with an operating margin of 12.7% and a company-adjusted return on capital employed of 13.5%. These are decent figures, in my view.

My view: VP appears to be executing well in mixed market conditions. Although some elements of the company’s performance are linked to wider cyclical and economic factors, these seem to be well managed.

VP looks prudently run to me and is delivering attractive levels of profitability. Cash flow was weaker during the half year than the comparable period, but I think this reflected a normalisation of working capital. I don’t see it as a concern.

The shares currently trade on around 12 times forecast earnings, with a yield of more than 3%. Given the strength we’ve seen in markets such as housebuilding, I’m not sure if this is the cheapest time to buy this stock - I can see some cyclical risks.

However, VP looks like a good quality business to me that’s likely to deliver for shareholders over the long term. Although liquidity looks limited, it’s certainly a stock I’d be happy to hold in a long-term portfolio.