Hargreaves Services – striding away from coal will help build sustainable growth

An announcement on Christmas Eve from Hargreaves Services (LON:HSP) grabbed my attention.

Further research into the effects of the content of that statement persuaded me to prepare a quick profile on this diversified group, which delivers its services to the industrial and property sectors.

Global services

Although the group’s head office is in Durham, it actually has some 2,000 employees working on its various projects across the world.

Its industrial services include outsourced bulk materials handling, logistics and mechanical and electrical engineering into key industries such as power, steel, port operations and refineries both in the UK and South East Asia.

The group processes and distributes a wide range of materials, including solid fuels, wastes and minerals. Its bulk logistics team is one of the UK’s leading service providers to the environmental services and minerals sectors.

Currently its solid fuel trading operation looks to satisfy the ongoing demand in the UK for production of cement, brick and sugar to name a few critical industries; for which coal remains an essential energy source. It also remains essential to a number of domestic heating needs, including some schools, prisons and hospitals.

Hargreaves’ specialist earthworks side provides earthmoving, advisory and contracting services to large scale infrastructure projects within the UK.

Its history is in coal mining but its future is not

The group has a long history in coal mining, however all coal mining operations ceased in the summer 2020.

But it has retained the skills developed from that long history and now provide operational management, geotechnical, land remediation and aftercare services into the mining and quarrying sectors.

It has a dedicated team of professionals who operate, restore and make safe mines and quarries and landfill sites across the UK.

Land regeneration

With the group controlling some 13,000+ acres of land across the UK, it is using its considerable expertise in brownfield regeneration of derelict sites, thereby looking to realise significant value from its portfolio.

Cash sale defines new direction

Last Thursday the group announced the £24m cash sale of its entire inventory of speciality coal to HRMS, its independently financed German Joint Venture, thereby helping to end its material direct business interests in coal.

Its remaining coal stocks will then comprise heavy industrial coal, which is expected to be sold to third parties over the remainder of the current financial year. The hope is that it will have almost reduced its coal inventory by 31 May 2021, the end of its current financial year.

Importantly, the group by the end of this financial year, will also have eliminated its net bank debt.

Interims results due in next month

On Wednesday 27 January the company should be declaring its interim results for the six months to end November. We already know that due to delays on the HS2 Project its earthworks side will have been hampered in its earnings ability.

Expectations for H1 are that revenue and profits will be below the comparable in 2019.

However, for the final half, good contract news on its industrial services side together with progress in its land division, will combine to see higher profits, up from £4.9m before tax to £7m for the year to end May 2021. Revenues are expected to be some £31m lower at £191m. Earnings could be 19p a share, almost covering an estimated 20p per share dividend.

Brokers estimates for next two years

Analyst James Tetley at the group’s brokers N+1 Singer is estimating the prospective revenues for 2022 and 2023 will be £195m then £210m respectively.

In the same time frame, he sees £10m adjusted pre-tax profit for 2022, then £10.5m, worth 26.5p then 27.7p per share in earnings, more than covering the anticipated 20.5p then 21p per share in dividends.

Considering that the closing share price last Thursday evening was 263p, that puts them out on just 13.8 times current year earnings, 9.9 times prospective 2022 and 9.5 times 2023 earnings.

A thumping yield

But well worth consideration is the fact that, and this just has to be a big investment attraction, at 263p its shares will be yielding a cracking 7.6%.

There are 32,282,346 shares in issue, of which 856,410 are held in Treasury.

Large holders include Harwood Capital (28.50%), GB Holdings (2021) Ltd (8.20%), Downing (7.23%), Schroder Investment Management (6.03%), Canaccord Genuity Group (5.00%), Axxion S.A.(4.96%), Artemis Investment Management (4.55%), and NFU Mutual (4.21%).

In February of this year the £85m capitalised group’s shares were trading at around 325p, following last week’s news I see them returning up to and above those levels in early 2021.

I now set my Target Price at 325p.