- Interim pre-tax profit rises 80 per cent to £18.7mn on 53 per cent higher revenue of £116mn
- First half EPS of 52.2p covers 72 per cent of full-year estimates
- Net asset value per share rises a third to 602p
Hargreaves Services (HSP:430p), a diversified industrial services group and brownfield land developer, has delivered eye-catching results for the six months to 30 November 2022.
The group’s services business put in a storming performance, lifting revenue by half to £108mn and trebling operating profit to £9mn. It has more than 50 term and framework contracts, most of which have inflation-related escalation clauses to insulate the group from pricing pressures. The HS2 earthmoving contract was the key contributor, but even after discounting the positive impact it had, the division still delivered 8.7 per cent revenue growth on the back of work on engineering projects.
Hargreaves’ land promotion business was no slouch either, reporting a six-fold rise in operating profit to £1.3mn on 47 per cent higher revenue of £8.7mn, buoyed by the sale of 4.3 acres of land (for 100 new homes) to Ogilvie Homes at Bindwells, East of Edinburgh. There are a further 120 acres remaining to be sold over the next nine years within the first Phase of Blindwells, suggesting scope to generate more than £100mn of additional land sales at the site. House broker Singer Markets expects the land division to have a robust second half, too, pencilling in £3.7mn of operating profit on £6.3mn of revenue.
Although high commodity prices explain the 20 per cent rise in post-tax profit to £10.8mn at German metals trading subsidiary, HRMS, a supplier of specialist raw materials to European customers in the steel, smelting, ferroalloy, limestone, and ceramic industries, softening in commodity prices means that Singer Markets expects a lower contribution of £4.7mn in the second half. Hargreaves owns 86 per cent of HRMS, so although the forecast £15.5mn full-year net contribution from the associate will be down on the record £28.2mn reported in 2021/22, it still represents an impressive 23 per cent return on equity in the business.
Post results, Singer left its full-year earnings per share (EPS) and dividend per share estimates unchanged at 71.7p and 21p, respectively (2022: 100p and 20.4p), implying the shares are rated on a forward price/earnings (PE) ratio of six and offer a prospective dividend yield of 4.9 per cent. They also trade on an unwarranted 26 per cent discount to net tangible asset value of 585p.
Although Hargreaves' share price has more than doubled since I initiated coverage, at 206p (Alpha Research: ‘A high yielder offering significant hidden value’, 19 March 2020), and the board has paid out 41.4p a share of dividends, there has been profit taking since I covered the annual results six months ago (‘Targeting deep value opportunities’, 27 July 2022). I feel it has gone too far, as the attractive earnings multiple, dividend yield, price-to-book value ratio as well as Singer’s sum-of-the-parts valuation of 710p per share highlight. Buy.
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