Hargreaves Services is primed for growth after exiting coal
A major shift in the business means now is an excellent time to buy small cap Hargreaves Services (HSP:AIM). The group delivers projects and services in the infrastructure, energy and property services, principally in the UK but also in South East Asia.
Its main division, Distribution and Services, provides waste handling and logistics to various sectors together with specialist earthworks for major infrastructure projects.
Hargreaves Land develops brownfield sites for both residential and commercial construction and works with all the major UK housebuilders.
The group also used to own a mining business, producing and selling coal to industrial customers, but in July 2020 it ceased operations and in December it sold all of its specialty coal inventories to its German joint venture HRMS for £24 million.
Hargreaves was left with a small inventory of heavy industrial coal, which it will have sold by the end of the current financial year in May, and a 49.9% stake in HRMS but importantly an 86% economic stake.
WHAT THE COAL EXIT MEANS
Ending coal trading means turnover will be lower by £25 million this year and £30 million next year, but pre-tax earnings will be unaffected as Hargreaves will have lower working capital costs and will take the bulk of the profits generated by HRMS as a ‘share of associates’.
Longer-term, HRMS aims to grow to €300 million of annualized revenue serving the steel, cement and other heavy industrial sectors in Germany and the UK, making Hargreaves’s stake a valuable long-term asset.
In the interim, the coal disposal makes the group’s results much less seasonal while the receipt of £24 million makes it debt-free and allows it to negotiate much improved borrowing terms.
The core business has just been boosted by a five-year deal with biomass energy producer Drax (DRX) for materials handling, plant operation and maintenance at Selby, starting in April, cementing its position as a key supplier.
Work on HS2 had been delayed, but the firm is close to signing a revised four-year contract on a cost-plus basis with the main contractors. Having been bitten in the past, Hargreaves no longer works on a fixed-price basis.
Meanwhile the property business is moving at pace with the sale of two plots at its Blindwells development near Edinburgh to house builders Bellway (BWY) and Persimmon (PSN), a first sale at its Unity site in Doncaster and the signing of a new site at Bridlington.
As a cherry on top, the firm has reinstated its annual dividend and will pay a 12p per share special dividend from the proceeds of the coal sale later in 2021.