- Better than expected performance from German metals trading subsidiary
- Strong performance from services division
- Cash position bolstered by loan repayment
Hargreaves Services (HSP:421p), a diversified industrial services group and brownfield land developer, will reveal an improved cash position when the group releases full-year results on 26 July 2023.
HRMS, its German metals trading subsidiary, provided a better-than-expected contribution to the business which contributed considerably to the improvement. HRMS is a supplier of specialist raw materials to European customers in the steel, smelting, ferroalloy, limestone, and ceramic industries. True, a softening in commodity prices means that the subsidiary’s post-tax profit will be below the £28.2mn reported in the previous financial year, as per previous guidance, but it will now be above house broker Singer Markets’ current forecast of £15.5mn.
The better-than-expected performance from HRMS offsets the impact of some delayed transactions within Hargreaves’ land promotion business. Also, some of the shortfall is also being made good by Hargreaves’ services business, which is benefiting from a valuable HS2 earthmoving contract. Singer expects the services division to increase operating profit by 36 per cent to £10.9mn.
As a result, Hargreaves’ board expects to report adjusted pre-tax profit of at least £25.8mn and post-tax profit of £23.9mn for the 12 months to 31 May 2023. This is a robust performance given that HRMS accounted for 81 per cent of the group's post-tax profit of £34.8mn in the previous financial year. Moreover, excluding lease liabilities on HS2 plant equipment, the debt-free group closed the financial year with £22mn of cash after the repayment of a £15mn loan from HRMS. The healthy liquidity position means that shareholders can expect the payout per share to be raised from 20.4p to 21p at a cost of £6.8mn. The progressive dividend policy and unwarranted 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).
The board has since paid out total dividends of 44p, and the shares have more than doubled in value, too. However, they are still only rated on a modest price/earnings (PE) ratio of six, offer a dividend yield of 5 per cent, and are priced 31 per cent below the estimated book value of 609p. Buy.
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