Disclosure: I own shares of Hargreaves Services.
Yesterday’s update from Hargreaves Services (LON:HSP) triggered a surge of buying that lifted the shares nearly 10% and resulted in twelve times the normal number of shares changing hands.
So what triggered this burst of enthusiasm for a stock that’s been comprehensively out of favour?
The firm published a strategic update which confirmed the underlying value in the shares that I discussed following the firm’s interim results. You can read the full update here and see the presentation here, but I’ve summarised the main highlights below:
- Core business: Hargreaves is going to bring forwards the closure of the majority of its mining business. The group will focus on core businesses of coal distribution, industrial services, transport and earthworks/infrastructure going forwards. The board’s view is that these should be able to generate an annual operating profit of £10-£15m in the medium term.
Taking the mid-point of this estimate and assuming tax and further deductions of about 30% implies post-tax profits of £8.75m. That’s equates to a P/E of around 7 at the current £55m market cap. That seems about right.
- Property & Energy: The firm has 18,500 acres of land in the UK. Work is underway on a number of housing and energy projects. The energy projects are listed as energy from waste, onshore wind, exploiting existing grid connections and solar.
The board is targeting £35-£50m of “incremental value” from property and energy over the medium term. That’s considerably more than I estimated previously and on a conservative estimate represents half to two-thirds of the current market cap.
- Realising value from legacy assets: Hargreaves still has considerable stocks of coke and coal plus surplus plant and equipment which is believes have a net realisable value of £66m. — that’s more than the current market cap.
There is some uncertainty about this amount due to the potential for writedowns on the firm’s loans to the Tower Colliery joint venture. But Hargreaves plans to liquidate these surplus assets by the end of May 2017. The firm does have a good track record of generating cash from surplus and legacy assets, so I’m reasonably confident this will be handled well.
- Net assets of £140m: Hargreaves’ update yesterday said that the group’s net assets at the end of March were £140m, comprising £52m (core trading), £22m (energy/property) and £66m (releasing value from surplus assets and inventories).
In my view, the current market cap is about right for the firm’s ongoing business. On top of this Hargreaves’ property portfolio and surplus assets have the potential to generate perhaps £80-£100m of one-off gains over the medium term.
My mistake with this investment was to buy too soon. But based on yesterday’s update I’m happy that I decided to average down and intend to continue holding. I believe there could be substantial upside from the current price of 170p.
Disclaimer: This article is provided for information only and is not intended as investment advice. Do your own research or seek qualified professional advice before making any trading decisions.