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Priced for a highly profitable outcome

Analysts have pushed through 25 per cent earnings upgrades for an industrial services group and land developer, but it’s still only trading on a PE ratio of nine and offers a decent dividend, too
Priced for a highly profitable outcome
  • First half pre-tax profit surges 10-fold to £10.4mn
  • Analysts upgrade 2022 to 2024 EPS estimates by 25 per cent
  • Annual dividend of 20.4p a share forecast

Hargreaves Services (HSP:480p), a diversified industrial services group and brownfield land developer, has prompted analysts to push through major earnings upgrades for the fifth time in less than a year.

German metals trading subsidiary, HRMS, has been the key driver, contributing £9.3mn of net profit in the half year, a near 10-fold rise on the same period of 2019, buoyed by favourable commodity markets and improved efficiency at its carbon pulverisation plant.

Analysts at house broker Singer Capital Markets have taken note, upgrading their 2022, 2023 and 2024 earnings per share (EPS) estimates by a quarter to 55.5p, 49.2p and 49.8p, respectively. Frankly, I would not be surprised to see further upgrades in due course given that all parts of the group are firing on all cylinders.

HRMS is a key supplier of specialist raw materials to major European customers in the steel, foundry, smelting, ferroalloy, sugar, limestone, insulation, refractory and ceramic industries. First-half volumes traded surged 80 per cent to 750,000 tonnes, with gains registered across all product categories. Margins are far higher, too, due to sustained increases in pricing, especially in pig iron.

In addition, HRMS’s Carbon Pulverisation Plant close to Duisburg, a key hub for central Europe, is on course to process 100,000 tonnes of pulverised content this year from carbon based raw materials, including coal and coke. It offers customers logistical, technical and cost advantages over alternative materials. Moreover, with capacity to process 400,000 tonnes a year, the plant is set to deliver sustainable profit growth in the coming years.

HRMS’s opportunistic €1 acquisition of a 94.9 per cent stake in DK Recycling, a German company that produces 285,000 tonnes of high-quality pig iron by recycling waste material from the steel industry, has turned out to be a cracking deal. Located adjacent to HRMS’s plant at Duisburg, DK was operating around break-even at the time of the purchase in late 2019, but HRMS’s management boosted DK’s profitability by making operational changes (cost reduction measures and improving sales and procurement processes). The subsequent surge in pig iron and zinc prices has sent profits surging, so much so that DK is now making a “substantial contribution to the group”. Given the scale of the profits being made by HRMS it’s hardly surprising that Hargreaves’ directors have decided to hold onto the business rather than sell it to a larger player as they had been considering.

Hargreaves’ land regeneration division is also on a strong growth trend. The sale of 12.9 acres of land to Persimmon (PSN) at the group’s flagship 390-acre site at Blindwells, a former open cast mine located near Edinburgh, realised £9.6m and there are another eight land parcels to be sold in the first phase of the project. In addition, the group’s joint venture, Unity, has agreed the conditional £15m sale of 36 acres (for new homes) at the 618 acre-site that surrounds the former Hatfield Colliery near Doncaster.

Hargreaves offers ESG credentials, too. Since securing planning consent at the 1,049-acre Westfield site in Fife, a site investment programme has been implemented to deliver renewable energy projects including a new waste facility capable of delivering heat and power to adjoining occupiers.

Hargreaves' share price has risen 133 per cent since I initiated coverage, at 206p (Alpha Report: ‘A high yielder offering significant hidden value’, 19 March 2020), and the board has also paid out 21p a share of dividends. The price achieved my 575p target after my last article (Alpha alert for material gains’, 28 July 2021), before succumbing to profit taking.

On a price/earnings ratio of nine, offering a prospective dividend yield of 4.2 per cent, and trading at book value parity, a return to those highs is well overdue. Buy.


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