Harworth's shares are mispriced

While great for the planet, this shift has long hit UK coal-mining regions – and producers – hard. By 2011, a combination of reserve exhaustion, high costs and planning permission constraints had sent UK Coal, the country’s largest miner, to the wall. Within two years, the group had split up and gifted three-quarters of its property holdings to its pension trustees; by 2015, the company had re-listed and bought back the property assets it didn’t own.

This is the complex back story to Harworth Group (HWG), named after the Nottinghamshire town whose collieries and pits once served the River Trent power stations.

Today, the group pitches itself as one of the UK’s “leading land and property regeneration companies”. In less puffy terms, it is the master planner for a huge land bank, of which legacy UK Coal properties now make up around 15 per cent. Harworth owns, develops and manages more than 15,000 acres of land across 100 sites in the Midlands and north of England, and aims to sell on, manage or convert former industrial areas into new residential, logistics or industrial schemes.

This might sound like slow-moving work. But there are three good reasons to believe the market has failed to see Harworth’s true worth, as we will unpack below. In short, a very strong set of interim numbers, a premium takeover offer for a peer and a new long-term strategy all suggest the current discount to net asset value (NAV) is too conservative.  

How it works

For investors, it’s perhaps simpler to think of Harworth as a closed-end fund. Although, unlike the real-estate investment trusts (Reits) that dominate London’s listed property sector, the group is not obliged to pay out 90 per cent of its income via dividends. So while it does make two small cash distributions each year, its principal focus is to grow shareholder equity and recycle the lion’s share of its profits into developing its portfolio.

Interim results show this portfolio is now worth £748m (see chart below), of which around 42 per cent by value is focused on income generation. Income generation assets comprise a ‘natural resources’ portfolio that includes wind, solar and methane-capture schemes, as well as logistics and industrial assets that have either been acquired, or developed and retained. In common with other big-box or logistics assets property groups, the latter segment is particularly consistent: by the end of June, 97 per cent of first-half rents had been collected, the average lease term stood at 11.8 years and just 3 per cent of properties stood vacant.  

Together, these assets provide enough recurring rental income to cover administrative costs, tax and interest payments. By the standards of most property companies, leverage remains very manageable.

Harworth’s management activities are where the group really adds value. Around a third of the residential land bank is consented, meaning either the company or a third-party buyer can commence building. Fortunately, both of the group’s core development focuses – industrial and residential – are deeply structurally undersupplied, meaning demand for these types of developments should stay strong.

Chief among these is the clamour for logistics assets from both tenants and investors, which has only been accelerated trends toward ecommerce since the pandemic hit. In fact, take-up of logistics space was the strongest on record in the first half of 2021, according to Savills, which helps to explain why the value of Harworth’s portfolio was marked up by £106m in the period (see table), compared with a £23.2m mark down a year earlier.

Contrary to what you might imagine, huge value can be extracted from old disused brownfield sites, which were often built near arterial roads and motorway networks and well-connected to rail and power.

With this all in mind, and against a strong backdrop, chief executive Lynda Shillaw has just completed a strategic review of the business, which concluded that Harworth can double the net disposal value (NDV) of its portfolio to more than £1bn (from the £516m recorded at the end of 2020) within five to seven years.

It will do this in four ways: by increasing the group’s direct development of logistics and industrial assets; accelerating sales of residential land; growing the land bank; and repositioning existing investment assets to modern Grade A.

From a shareholder perspective, the key driver of capital growth is likely to come from an acceleration of both industrial and residential developments. Between 2022 and 2026, Harworth thinks it can more than double direct development activity in industrials and logistics, compared with the past five years, generating up to £440m-worth of gross development value in the process. By 2026, it also hopes to be selling 2,000 residential plots per year, up from a recent average of 862.

What’s Harworth worth?

Despite the considerable growth potential in the portfolio and the balance provided by asset management and income-generation activities, Harworth is valued at a 16 per cent discount to its forecast next-12-month NAV.

This seems unfair. The mid-year NAV of £541m is calculated by an independent valuer, BNP Paribas, and it's worth noting that once development property valuations are factored in Harworth’s NDV is already £591m, or 183.2p a share. But while this is a 14.5 per cent uplift on the December figure, it also arguably fails to take account of the price a buyer might be prepared to pay for the full portfolio.

Fortunately, prospective investors have a useful benchmark to point to, following the recent £1.27bn takeover of St Modwen Properties by Blackstone. Like Harworth, St Modwen focuses on regenerating land for logistics and residential use across England and Wales. Blackstone, which has proved itself to be the premier largescale buyer of property assets in the UK, bought the company at a 20 per cent premium to book value.

In doing so, the US investment giant has sent a strong signal as to where it sees long-term value creation and capital growth in the UK property market. Judging by the market’s valuation of Harworth (and arguably St Modwen) it isn’t a view shared by other investors, a view that may have something to do with the perceived complexity of dealing with planning authorities – even when so much land is already consented.

“The market always struggles with strategic land businesses,” argues Shillaw. “What they need to do is look at the specialists within the business, who have the expertise in managing strategic land. My personal view, which is what one of our major investors recently said to me, is that if we continue to deliver, the rest will come. Cream floats.”

Unless Shillaw and her team hit a major roadblock, which given Harworth’s diversification and breadth is unlikely, it does not seem fanciful to expect the strategy to push the shares north of 200p in short order. The track record of NAV is already good (see chart below). But at the St Modwen take-out price, the company would be worth at least 25 per cent more that its market capitalisation.