Shares in coal supplier Hargreaves Services (HSP) crashed after mining was halted at its Maltby deep pit in South Yorkshire. But the sharp fall is overdone and there is value in Hargreaves whatever its bosses do with Maltby. That's because Hargreaves is a lot more than just one mine. True, it's really only a glorified coal merchant, but that's driving sales and profit decently. For those who can see through the turbulence, we think the shares are a buy.
- Smart growth in energy & commodities division
- Contract wins in industrial services
- Best if Maltby stays open
- Ultra low share rating
- Cost of closing Maltby
- Malty has a limited life anyway
Problems at Maltby arose as the mine exhausted one coal seam and started to develop a new face. The problems could be terminal for the mine. Final geological results are due next week and Hargreaves has begun redundancy talks with around 530 employees. A decision is due on 31 October.
Sure, the Maltby decision, whatever it is, will have a big impact on the next two years' results. But the Hargreaves share price halved when Malty production was stopped, and that looks overdone for a mine that only had an economic life of eight years when it was bought in 2007 and for a group that generates 74 per cent of operating profit from other activities.
One description of Hargreaves as 'the Glencore of coal' may be a little generous; however, there is more to it than just mining. The Energy and Commodities division buys coal globally to supply the UK power and steel industry; it generates two-thirds of the group's sales and over half its profits, both of which rose smartly in 2011-12.
The Industrial Services division also reported significant contracts wins in the steel industry and £30m-worth of work helping UK power stations convert to burning biomass. The transport side reported tough but stable markets, with rising profits. So closing Maltby would not be a disaster. Indeed, take deep coal mining from the group's activities - and the related capital spending - and the shares might be less risky.
HARGREAVES SERVICES (HSP) | ||||
|---|---|---|---|---|
| ORD PRICE: | 730p | MARKET VALUE: | £199m | |
| TOUCH: | 730-736.5p | 12M HIGH: | 1,278p | LOW: 530p |
| DIVIDEND YIELD: | 3.3% | PE RATIO: | 5 | |
| NET ASSET VALUE: | 499p | NET DEBT: | 57% | |
| Year to 31 May | Turnover (£m) | Pre-tax profit (£m) | Earnings per share (p) | Dividend per share (p) |
|---|---|---|---|---|
| 2010 | 460 | 30.7 | 77.5 | 13.5 |
| 2011 | 552 | 36.9 | 91.9 | 15.5 |
| 2012 | 668 | 43.1 | 109 | 17.8 |
| 2013* | 727 | 46.9 | 114 | 22.5 |
| 2014* | 768 | 64.3 | 155 | 24.3 |
| % change | +6 | +37 | +37 | +8 |
Normal market size: Market makers Matched bargain trading Beta: 0.9 *N+1 Brewin estimates (not comparable with prior years) | ||||
If the mine is closed, analysts from broker N+1 Brewin forecast there will be a £50m non-cash write off. The cash-flow impact will be positive, with £8m of redundancy costs offset by up to £20m inflow from the sale of equipment and assets. This would mean a reported loss for 2012-13, but, excluding the exceptional items, underlying pre-tax profit for the continuing business of £55m (giving EPS of around 133p), with pre-tax profits rising marginally in 2013-14 to £56m.
The best case is for the mine staying open. In which case, N+1 Brewin thinks there is £30m-worth of coal left in the pit. So, after this year's hiccup, Maltby would generate £8m of profit in 2013-14, giving the group adjusted pre-tax profits of £64m. Either way, the shares are deep in value territory.
