With a portfolio comprising largely disused coal mines, Harworth (HWG) may not get the pulse racing, but we think there is much more potential for growth than the current 31 per cent share price discount to forecast net asset value (NAV) suggests. There's not much of a dividend, but there is huge potential sitting in the 22,000-acre portfolio.
- Shares trade at a discount to NAV
- Huge land bank
- Strong demand for commercial and residential space
- Low gearing
- Modest dividend
- Investors might be wary because of Brexit
Coal mines were once the heart of the community where much of Harworth's land lies, and local authorities are very keen to see something take their place. This has aided the company's success in developing land for building houses and commercial space, while selling plots to fund building and acquire further brownfield sites.
In a typical deal, a 43.7-acre site was recently sold to Lidl for £22.5m; that's around £9m above book value. Meanwhile, earlier this month, it secured a resolution to grant planning permission for a major commercial redevelopment of the former Kellingley Colliery in Yorkshire. This is ideally situated close to the M62 and has its own rail connection. There's even a canal close by. The 151-acre site will provide up to 1.45m sq ft of manufacturing and distribution space and could generate several hundred jobs. Demand for well-connected industrial and logistics space is being driven by the change in consumer habits favouring the internet, and major producers have been building up networks of distribution sites to cater for this.
Harworth has also signed four planning promotion agreements (PPAs). These are agreements with landowners where Harworth incurs the cost and risk of promoting the land through planning, and if successful it shares some of the value uplift when the land is sold. These four agreements could deliver around 500 residential plots, bringing the total being promoted through PPAs to potentially around 1,100 plots.
| HARWORTH (HWG) | ||||
|---|---|---|---|---|
| ORD PRICE: | 100.5p | MARKET VALUE: | £323m | |
| TOUCH: | 99-102p | 12M HIGH: | 106p | LOW: 69p |
| FWD DIVIDEND YIELD: | 0.8% | TRADING PROP: | £8.4m | |
| DISCOUNT TO FWD NAV: | 31% | |||
| INVESTMENT PROP: | £390m | NET DEBT: | 12% | |
| Year to 31 Dec | Net asset value (£m)* | Net rental income (£m) | Earnings per share (p)* | Dividend per share (p) |
|---|---|---|---|---|
| 2014 | 9.7 | 3.2 | 0.6 | nil |
| 2015 | 106 | 8.9 | -1.3 | 0.51 |
| 2016 | 120 | 12.8 | -1.3 | 0.75 |
| 2017* | 133 | 9.4 | -0.1 | 0.8 |
| 2018* | 145 | 9.7 | -0.2 | 0.8 |
| % change | +10 | +3 | - | - |
Normal market size: 3,000 Matched bargain trading Beta: 0.12 *Investec estimates, adjusted NAV and EPS figures | ||||
Disposals generated £58.9m in 2016, while over £31m was spent on six acquisitions, including a 50 per cent purchase of the investment vehicle that owns gateway 45, the largest live commercial development in Leeds. There are a further four options signed and another four in negotiation. A mixture of commercial deals provides a useful and diverse revenue stream; residential deals include serviced plot sales while commercial deals encompass plot sales, pre-lets, forward funded and direct development. In particular, Harworth is working to increase its recurring revenue stream to cover overheads, including strategic land promotion, interest payments and ultimately tax and dividends.
And there is plenty of firepower to fund further activities if required. An increase from £65m to £75m was secured for a new revolving credit facility with RBS, extended on the same terms for an additional year to 2021, and a loan-to-value ratio at the end of 2016 stood at a nominal 9.9 per cent. Further funds have been generated through last month's share placing at 95p, which raised around £27.8m. This will be used primarily to accelerate the expansion of the strategic land bank.
