- Annual underlying pre-tax profit of £27.3mn ahead of forecast
- 21p dividend per share
- Renewable assets valued at more than four times book value
- £15mn pension scheme buyout planned
Hargreaves Services (HSP:468p), an industrial group and land developer, has reported a 6 per cent earnings beat. It means that annual pre-tax profits came in only 10 per cent below last year’s bumper result despite weakness in commodity prices, which impacted the contribution from HRMS, its German metals trading subsidiary.
HRMS is a supplier of specialist raw materials to European customers in the steel, smelting, ferroalloy, limestone and ceramic industries. The joint venture contributed £15.5mn of post-tax profit, down from a record £25mn in the previous financial year. New group finance director Stephen Craigen is budgeting for a £12.5mn profit contribution this year, but HRMS’s lower capital requirements mean some of the £70mn capital tied up in the subsidiary can flow back to Hargreaves, a positive for capital distributions to shareholders.
Two-thirds of last year’s profit shortfall was made good by the group’s land division (underlying pre-tax profits rose from £2.1mn to £3.9mn), and its services business (profits rose from £7.6mn to £12.3mn). More than a quarter of services revenue was generated from the group’s HS2 earthworks contract, but Hargreaves also landed 10 new term and framework contracts, taking the total to more than 60. These contracts secure 70 per cent of house broker Singer Capital Markets’ divisional revenue estimate of £194mn for the current financial year, offering strong earnings visibility.
The land promotion business is expected to deliver another decent result, too, having exchanged or agreed sales on 750 plots of land, of which 70 per cent will be completed this year. These sales include a 20-acre site sold for £18.5mn to Avant Homes at its Blindwells site, east of Edinburgh. It remains a long-term profit stream, with the first phase expected to be completed in 2032, and the second phase of 1,400 plots being progressed. Singer forecast a 50 per cent higher divisional operating profit of £4.5mn in the new financial year.
Hidden balance sheet value
Chief executive Gordon Banham also highlights the recent independent valuation of the group’s renewable energy assets (three wind farms, six access agreements and two solar farm leases), which have been valued between £27.2mn and £28.9mn (83p to 89p). These assets are in the books for only £6.6mn (20p), accounting for 3 per cent of group net asset value of £201mn (618p). The plan is to realise value from them over the next five years and return the capital to shareholders.
Shareholders are also set to benefit from the spike in government bond yields as the group is planning to transfer its pension scheme liability to an insurer at a cost of £15mn and save £1.9mn in annual deficit reduction contributions. With Hargreaves' debt-free balance sheet boasting cash of £21.9mn and £36.4mn of finance leases secured on the HS2 equipment, a pension scheme buyout could free up more cash to return to shareholders. Previously, the pension trustees prevented share buy-backs due to the pension deficit. That will no longer be the case.
Moreover, with the shares trading well below Singer’s 770p (upgraded from 710p) sum-of-the parts valuation, and on a prospective price/earnings (PE) ratio of 7.5, deploying cash in this way is a win-win situation for shareholders who are also benefiting from a 4.5 per cent dividend yield.
The progressive dividend policy and share price discount to book value were key bull points when I initiated coverage, at 206p (Alpha Research: ‘A high yielder offering significant hidden value’, 19 March 2020). Having reiterated that buy call, at 421p, ahead of the results (‘A cash-rich industrial stock with a 5 per cent yield’, 6 June 2023), I maintain that advice, at 468p, and raise my target price from 609p to 700p. Buy.
