Harworth (HWG) operates in north England, bringing brownfield and greenfield sites through remediation and planning to sell to housebuilders. It also generates income from a portion of the investment properties that make up almost half the portfolio.
Very large land bank
Modest gearing
The shares trade at a discount to NAV
Strong demand for beds and sheds
Modest dividend
Vulnerable to any downturn
The key attraction of Harworth is the size of its land bank, which stands at over 23,000 acres, and the potential to create value by making it ready to build on. The business model is simple but entails much hard work.
Some of the portfolio is old coal mining sites, which reflects the company's history as the real estate arm of UK Coal, Britain’s last deep miner. Its land is situated in areas where there is strong demand both for residential and commercial use; the so-called beds and sheds sectors. Having obtained planning consent, the land is prepared, utilising the company's skills and experience in carrying out decontamination work. Then in come the roads and connection to utilities, which means that a builder can start work almost immediately.
Valuations on a contaminated site with no planning consent tend to be a fraction of the end value. Figures vary depending on the location, but Harworth targets acquisitions equal to around 10 per cent of likely end values. This leaves plenty of room for profit after the necessary spending on remediation, infrastructure and planning. The size of the sites Harworth develops means valuers price plots using a large-site discount, which represents about 20p per share that is not seen in reported net asset value (NAV).
| HARWORTH (HWG) | ||||
| ORD PRICE: | 116p | MARKET VALUE: | £373m | |
| TOUCH: | 115-116p | 12-MONTH HIGH: | 133p | LOW: 104p |
| FWD DIVIDEND YIELD: | 0.9% | TRADING PROPERTIES: | £28.2m | |
| DISCOUNT TO FORWARD NAV: | 22% | NET DEBT: | 24% | |
| INVESTMENT PROPERTIES: | £279m | |||
| Year to 31 Dec | Net asset value (p) | Net operating income (£m)* | Earnings per share (p)* | Dividend per share (p) |
| 2016 | 115 | 21.6 | 2.6 | 0.8 |
| 2017 | 129 | 21.6 | 2.5 | 0.8 |
| 2018* | 138 | 24.8 | 3.7 | 0.9 |
| 2019* | 148 | 26.0 | 3.8 | 1 |
| % change | +7 | +5 | +3 | +11 |
| Normal market size: | 3,000 | |||
| Beta: | 0.66 | |||
| *Peel Hunt forecasts, adjusted NAV and EPS | ||||
The company is also developing commercial property. The plan is to keep some assets on its balance sheet to generate sufficient income to cover running costs and ultimately the cost of the dividend. Currently, almost half the group's properties are classified as investment properties. The commercial properties that are sold are developed on a pre-let basis.
The company is looking to balance sales with purchases. Harworth made six acquisitions for £50m in the six months to June 2018. The aim is to acquire about 1m square feet (m sq ft) a year of commercial space. Consented commercial space stands at 12.1m sq ft with a further 5.3m expected to be added by the end of 2020. On the residential side, the target is to acquire and sell 1,000 plots per year. In the six months to June, consent was granted for 529 plots, taking the total to 10,600, with an additional 5,900 expected by the end of 2020.
Progress on the both commercial and residential sides of the business has been impressive since the company was relaunched in 2015, and since then it has delivered compound annual total returns of 12 per cent a year; that’s double the average in the UK real estate sector.
