Strong cash inflows have improved the cash position of this company and it has a portfolio of valuable land assets that should add to the value of the company over the medium-term. Profit forecasts have been significantly upgraded on the back of the latest trading statement.
Bumper dividends are promised as cash is repatriated from an overseas joint venture, where performance is better than expected. This is on top of a growing underlying dividend. The share price has risen on the back of the trading statement, but it is still at a discount to NAV.
Past problems have been sorted out or are on course to being solved. This means that the operating activities have a good base from which to grow – albeit a reduced base compared with the past. Delays in HS2 have hampered revenues in part of the group, but other operations are doing better than expected.
Hargreaves Services (LON: HSP) has had a torrid time over the past few years and the business has had to change significantly. It provides transport, industrial and earthworks services, as well as developing land from legacy operations.
Hargreaves has historically been highly dependent on the coal market in terms of supplying coal, mining and providing associated services. The recent sale of the remaining stocks of coking coal for £24m to Hargreaves’ 49%-owned German associate company HRMS means that there is no longer any direct exposure to coal.
HRMS is the main reason behind the major upgrade by analysts. Although HRMS is 49%-owned, Hargreaves is entitled to 86% of the economic benefit. It is involved in minerals trading, operates a carbon pulverisation plant and a steel waste recycling plant.
Although HRMS is not consolidated, Hargreaves includes its share of post-tax earnings in the share of joint venture profit line. The estimated contribution for the year to May 2021 has been increased from £2.7m to £5.2m.
Underlying trading improved and the DK Recycling steel waste recycling business bought for €1 in 2019 is making a profit contribution of €1.5m. DK broke even in the first half and had consistently lost money for many years before it was acquired.
In the six months to November 2020, revenues declined from £124.7m to £92m, while underlying pre-tax profit more than halved to £1.1m. The second half has been much better.
The earthworks division has been slimmed down and offers specialist services. HS2 will eventually be an important contributor, but not this financial year. The forecast revenues for 2021-22 have been cut by £20m due to HS2.
Problem areas have been sorted out. British Steel is no longer a customer and the disputed contract relating to CA Blackwells has been sorted out in line with expectation.
The forecast profit for the full year has been raised from £7m to £9.9m, up from £4.9m in 2019-20, so there is some additional contribution from the wholly owned businesses as well as from Germany. A further trading statement will be published at the beginning of June.
Earlier this year, Hargreaves completed the sale of the first phase of the Blindwells, Edinburgh land to Bellway Homes – there are still two payments to be made. Further deals have been secured with Persimmon and Cruden Homes.
The Unity site in Doncaster has a link road to the M18 and there are negotiations to sell a 79-acre logistics site to a major retailer for £22m, which could happen next year. Contracts have been exchanged with a housebuilder.
A development in Bridlington has a £9.5m gross development value and there are other projects in the pipeline.
In total, Hargreaves has planning permission for 4,700 residential plots and four million square feet of commercial space. This will require investment by Hargreaves prior to more disposals, but there is a lot more value to be secured from the land business.
Net debt of £16.5m had been expected for the end of May 2021, but the outcome is likely to be net cash of around £10m thanks to lower working capital requirements. There will be additional investment next year, so Hargreaves is likely to return to a net debt position. There is a pension deficit, but it was less than £3m at the interim stage.
The interim dividend was 2.7p a share. This year’s normal total dividend is expected to be at least 8p a share. There will be an additional dividend of 12p a share funded by cash coming from HRMS. That additional dividend should carry on for at least three years.
In 2021-22, total dividends are expected to cost £6.7m. The underlying dividend is expected to grow steadily.
The transport operations are focused on the waste market and industrial services is winning new contracts. It will take time for the company’s land to deliver significant returns, but it will happen in the longer-term. HRMS is well set to grow strongly.
The delayed HS2 earthworks contract has led to a reduction in forecast 2021-22 revenues. However, improved contributions from elsewhere mean that the forecast pre-tax profit has been increased from £10m to £11.9m. That puts the shares on less than eleven times prospective 2021-22 earnings.
Forecast NAV is 395.4p a share. That does include some intangible assets, but the value applied to HRMS may be conservative given the recent performance. The share price, at 344.5p, is trading at a 13% discount to NAV. The yield is 5.8%, or 2.3% for the underlying dividend.
Hargreaves has a solid asset underpinning and operations that can improve their performance. The shares are cheap, and the yield is extremely attractive. Buy.