Hargreaves buoyed by German JV

Hargreaves Services (HSP) has delivered a steep increase in statutory profits at the half-year mark. The group provides an illuminating example of how a business can successfully evolve to meet wider changes in diversified industrial markets, while keeping a firm grip on finances.

The group exited coal markets at the end of 2020, a move that immediately reduced revenues, although there was no commensurate fall in profitability because of a significant reduction in the group’s cost base, along with the repatriation of profits from Hargreaves Raw Materials Services GmbH (HRMS).

Hargreaves' German joint venture (JV) delivered net profit of £9.0m, against £0.9m at the 2020 half-year. The HRMS carbon pulverisation plant is now operating at around a quarter of its annual capacity, but with the ramp-up in progress, management is now guiding for a “material increase” in profits during the “current and future years”.

The group also closed out the period with 85 per cent of revenue for the services segment secured for the current financial year. Management notes that the services business is now booking monthly revenues of over £2.0m from the HS2 contract.

The third business segment, Hargreaves Land, nearly tripled revenue to £5.9m in the period under review, while swinging to a £0.5m profit from a loss of £0.1m in HY 2020. Management highlighted further operational progress on both the commercial and residential aspects of the Unity joint venture, with the exchange of contracts for Bellway and Harron Homes.

Hargreaves is looking to exploit the accelerated shift in governmental response to the potential threat posed by climate change. This could entail the generation of energy from waste plants, together with the possible use of former surface mining sites for carbon sequestration – the removal of carbon dioxide from the atmosphere for storage in solid or liquid form.

Covid-19 has not had a material impact on trading and the group’s finances are in good order, with negligible net debt, although this is likely to ratchet up by the year-end due to investment in leased equipment for the HS2 contract. What’s more, management intends to dole out further payments from the undistributed profits of HRMS.

Singer Capital Markets has increased its target price by 30p to 590p, representing 12 times forecast price/earnings for 2023. That implies 22 per cent headroom based on the current share price, but given the capacity build at HRMS and the inflows from HS2, analysts will not be ruling out further upgrades. Buy.

Last IC view: Buy, 354p, 01 Aug 2018

NB: Hargreaves Services was the subject of Simon Thompson's March 2020 Alpha Report. Readers were advised to buy the stock, then trading at 206p.

Simon's latest column on the group, in July 2021, advised readers to buy the stock at 480p.