Following a strong run since late 2020, shares in Hargreaves Services have slipped back to a level where they look very appealing once again. Final results were released in July and there has been a lack of news since then but there was little to cause concern at the time. The share price has now moved to a discount to the latest net asset value and on balance the shares have almost certainly fallen to a level where they represent good value.
The company is a diversified group which delivers key services to the industrial and property sectors. In the year ended 31 May 2021 revenue was £204.8m (2020: £222.2m) although the fall was anticipated due to delays to the full mobilisation of the HS2 project. Underlying profit before tax was £21.2m (2020: £4.9m) due mainly to the German joint venture Hargreaves Raw Materials Services GmbH contributing £13.6m (2020: £1.6m) and the Hargreaves Waystone Land LLP joint venture (Unity JV) contributing £4.1m (2020: nil) to underlying profit before tax. Basic underlying earnings per share were 70.7p (2020: 19.9p) and 50.8p (2020: 13.4p) on a reported basis.
Net cash including all leasing debt was £16.5m (2020: net debt of £28.1m). There was £28.3m of cash at bank as at 31 May 2021 compared with net bank borrowings of £13.5m as at 31 May 2020. Debt is now comprised entirely of leases with no net bank borrowings. The sale of speciality coal inventory combined with lower capital expenditure and working capital reductions have boosted the cash position and net cash is expected to reduce steadily throughout the year ending 31 May 2022 as capital expenditure for the HS2 project, which will be made up of leased equipment in the main, increases. A final dividend of 4.5p per share (2020: 4.5p) was supplemented by an additional dividend of 12p following the receipt of an equivalent sum from Hargreaves Raw Materials Services GmbH. The company plans to continue to pass through an additional 12p per share dividend from Hargreaves Raw Materials Services GmbH annually for the next few years. The German joint venture is likely to make a greater contribution to market expectations for the financial year ending 31 May 2022 than previously expected.
The company believes that shareholder value will be delivered in three ways. Firstly, it intends to continue to deliver reliable and growing profits in its Services businesses, aiming to increase the proportion of revenue which is derived from term contracts and frameworks. Secondly, the Hargreaves Land business is focussed on unlocking the inherent value of the existing property portfolio. Finally, the German joint venture has the potential to deliver substantial shareholder value in the next few years and strategic options are being explored. There appears to be little justification for the recent slump in the share price and we believe that a BUY rating is well deserved.
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