- Land division set for best full year ever
- PE ratio of 10 and dividend yield of 8.6 per cent
- 45 per cent discount to sum-of-the-parts valuations
Hargreaves Services (HSP:420p), an industrial group and land developer, reported a drop in first-half profits from £18.7mn to £2.7mn, but expects a materially better second-half performance.
The profit reversal was caused by the £1.9mn net loss (£10.9mn profit in 2022) from HRMS, the group’s German metals trading subsidiary, due to lower demand from a recession-hit Germany and weaker zinc and pig iron prices. HRMS is a supplier of specialist raw materials to European customers in the steel, smelting and ferroalloy industries.
Bearing this in mind, EU pig iron selling prices will benefit from recent EU sanctions against Russia and an increase in the gate fee charged to accept steel waste dust, which is recycled into both zinc and pig iron production, will boost margins to restore profitability of the joint venture.
A silver lining in HRMS’s lower trading activity is that it has reduced the subsidiary’s working capital requirements. Based on the future level of profitability, the directors expect a £7mn annual cash payment from HRMS, hence their decision to hike the full-year payout per share from 21p to 36p. Also, Hargreaves aims to complete the buyout of its defined-benefit pension scheme shortly, which will save £1.8mn in annual contributions, too. The cash flow can then be redirected to shareholders.
Land promotion business set for best year ever
Although the group’s land division reported a first-half pre-tax loss of £1mn, the business is on course to deliver its best full-year result. House broker Singer Markets forecasts a second-half pre-tax profit of £8mn, buoyed by land sales at the Blindwells residential development near Edinburgh, and the sale of its Energy from Waste (EfW) ground lease investment at Westfield in Scotland.
The directors also plan to start selling off the group’s renewable energy land assets (three wind farms, six access agreements and two solar farm leases) in the 2024-25 financial year and return the capital to shareholders. The assets are in the books for £6.6mn (20p), accounting for 3 per cent of Hargreaves’ net asset value of £198mn (603p), but they have been independently valued between £27.2mn and £28.9mn (83p to 89p).
HS2 and Sizewell C contracts boost services margin
The debt-free group has cash of £18.7mn and £28.8mn of leasing liabilities relating to equipment on an HS2 earthmoving contract which will reduce as it runs down. The contribution from the HS2 contract and works at the Sizewell C nuclear project were the key drivers behind the 20 per cent uplift in the unit’s underlying pre-tax profit to £7.8mn on slightly higher revenue of £109mn. More than 90 per cent of the services division’s £200mn revenue budget is covered for the 12 months to 31 May 2024, too.
A strong second-half forecast
The restoration of profitable trading at HRMS, bumper land sales and a resilient performance from the services division explain why Singer pencils in second-half pre-tax profit of £13.2mn, up from £8.5mn in the prior half-year. That’s not enough to cover the first-half shortfall, so annual earnings per share (EPS) are still expected to decline from 86p to 39.6p. However, Singer expects EPS to bounce back to 44.5p in the 2024-25 financial year, driven by a better showing from HRMS.
On this basis, the shares are rated on nine times forward earnings, offer a prospective dividend yield of 8.6 per cent and are priced on a 45 per cent discount to sum-of-the-parts valuations of 770p a share.
I last suggested buying Hargreaves' shares at 418p (‘Six micro-cap shares worth buying’, 9 November 2023), having initiated coverage at 206p (Alpha Research: ‘A high yielder offering significant hidden value’, 19 March 2020) and booked 65.1p a share of dividends excluding the latest 18p a share interim dividend (ex-dividend: 21 March 2024). The holding has outperformed the FTSE Aim All-Share total return index by 111 per cent in that 46-month holding period, a trend I expect to continue. Buy.
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