Hargreaves Services (HSP:AIM) finance officer Iain Cockburn today expanded on an eye-catching three-point plan which could see the coal trader deliver £3.00 a share of asset realisations over the next five years as well as as operating earnings of more than 30p a share annually.
Cockburn expects the coal trader’s latest financial year, the 12 months to 31 May, will be the last to be dogged by big losses on exceptional items and restructuring charges.
Results for the 12 months to 31 May 2016 show an underlying profit before tax of £3 million but Hargreaves reported a £10.5 million statutory loss because of a number of one-off charges.
Now Hargreaves’ management team, headed by chief executive Gordon Banham, is aiming to open up a new chapter after two years grappling with the fall-out from the UK’s rapid shift away from coal-fired power generation.
Hargreaves’ revival will be focused around three key areas, Cockburn explained in a call with Shares today:
- Developing strong core businesses;
- Realising value from its property and energy portfolio; and,
- Generating cash from surplus and legacy assets.
First and foremost among the plans at Hargreaves is the delivery of sustainable profitability. Cockburn says this can be achieved through a focus on two new divisions, Services and Distribution, after its traditional business of supplying coal to power stations collapsed.
Services includes three units: Earthworks, Industrial Services and Transport & Logistics.
Hargreaves will also continue to run a Distribution unit which will supply specialty coal into the higher margin market for domestic use in the UK.
Combined, the Services and Distribution units can deliver medium-term profitability of between £10 million and £15 million, Cockburn estimates. Those numbers are before central costs expected to run at £5 million a year.
Second, Hargreaves will focus on value realisation from its property and energy portfolio. This involves developing and selling pockets of a land bank totalling close to 10,000 acres as well as other initiatives around the development of energy infrastructure including wind farms and an energy-from-waste facility.
Hargreaves’ property and energy portfolio has a book value of around £25 million and Cockburn says an additional £35 million to £50 million of value can be generated on top of that over the next five years.
Finally, and the most near-term of all three planks of the strategy, Cockburn is optimistic about the potential to realise up to £66 million of value as surplus assets are sold off in parts of the business which will no longer continue.
At the low end of current expectations, the latter two planks of the strategy indicate value creation in the region of £100 million, or 314p a share. That doesn't include the potential valuation of the Services and Distribution units, which could in time generate operating earnings of between £10 million to £15 million before central costs.
One risk facing Hargreaves’ ambitious strategy to generate value are loans which have been provided to an open cast mining joint venture called Tower, which is struggling to meet repayments.
Hargreaves says in the full year report that its equity investment in the Tower unit as well as other amounts totalling £4.7 million have already been wiped out.
But Cockburn remains optimistic the loans can be repaid.
Other risks include the potential that Hargreaves' own lenders lose faith in its ability to repay some £32.3 million of debt as well as Hargreaves' obligations to a pension scheme which had a funding deficit at 31 May of £5.7 million.
Potential costs overruns on environmental remediation at shuttered coal sites are also a threat to Hargreaves' ability to create long-term shareholder value.
'Results for the year to May 2016 reflect the transformation that is taking place within the group and also highlight the strength of the balance sheet, despite the end-market shocks that have been suffered in recent years,' writes analyst Jon Lienard at house broker N+1 Singer.
'These shocks now seem to be behind the group and the future looks brighter. Medium term aspirations were outlined in April which include core operating profitability of £10m-£15m; £35m to £50m of incremental value from Property/Energy over 5 years; and £60m of cash realisation from surplus assets.
'It is still early days, but with net assets of more than 400p per share, management believes that significant value can be created.'
Lienard forecasts adjusted earnings per share (EPS) of 11.4p in 2017 and 16.3p a year later on sales of £363 million and £382 million, respectively.
One year ago, EPS in the year to 31 May 2017 was forecast at 39p, indicating the scale of the downgrades to profit expectations at Hargreaves over the past 12 months.
Investors interested in the story at Hargreaves could also check out Harworth Group (HWG), the rump of the ex-British Coal business which itself ran into difficulties and refocused on realising value from its property portfolio back in 2014.
Shares in Hargreaves traded 2.2% lower at 189p by the close of trading following today's results update, valuing the business at around £59 million.