Hargreaves Services Share Discussion Threads

[smithie6] 30/1/2022 10:28

Distributable profits.
As you say the JV partner in Germany is the majority partner wrt votes. But the 2 partners working as a team.
HSP have written that once the conditions such as bank loan conditions allow & the needs of the JV business then they expect the distributable profits to be released.
And I am sure that teaming agreement with the JV partner requires the JV to pay profits to HSP, HSP would not have funded the JV without some condition along those lines.
HSP invested to make money & the JV managers took it on for the same reasons. They will I am sure both want to see the JV pay out now they have taken the risk, done the work & been successful. And no-one lives for ever, the JV managers are probably in their 60s & the HSP directors, they will want to see the payback imo. Just piling up yet more millions inside the JV would make no sense.

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Just had a quick look at some info for the JV

Undistributed profits

41.7 million €. ( £34.3 million)

!!

Stand back....
'fire in the hold' !!

:-)))

[harrogate] 30/1/2022 10:00

I appreciate your optimism. On the subject of the distribution of the retained earnings from JV. Currently £3.9m. A couple of points. HSP have no control whatsoever in the distribution of profits out of JV as they only have 49 % of the voting shares. The bank covenants over there are extremely complex involving HRMS and the other parts of the JV such as DK. Cash flow does not move easily around the group. Bottom line is I don't expect any more than the current distribution to be coming our way for the foreseeable future

[smithie6] 30/1/2022 09:35

Anyone looked recently at the topic of cash/loan repayment from the JV up to HSP over the next 0-3 years ?

(Not an easy subject perhaps)

imo the 2 big share price drivers for 0-3 yrs are
1) revelation of markedly higher annual profit from the JV & that co. seems confident it will continue, & that not selling the JV in short term, so the profit keeps benefitting HSP (& hence impacting the share price via EPS & P/E rather than via a 1 off cash lump from a quick/'soon' sale at unknown date & price). (this is the driver for price rise so far imo)
(I bought back in at ~410p just for the future sale of the JV, & thinking it might take 1-2 years, how quickly things change)

2) cash payments to HSP of many millions of pounds from the JV, year on year !!.

(imo the stock market has ignored this, so far, in re-valuing HSP shares)

When bank loan rules allow the JV will be paying back to HSP the existing loans (from HSP) & then 86% of cash from profit. The JV will surely make >£20 million PAT this year. 86% = £17.1 million !. Just 3 years at £17.1 million
= £51 million,
1/3rd of the cap. value of HSP !. (~£1.6/share !)

Each to their own view but I think the share is still way underpriced.

And return of loans, is it ~£30 million ?
(~£1/share. Be a nice special payout !
£1 +£1.6 = £2.6 !!. 50% of current share price !)

Maybe a train convoy can be rinsed down after doing a pig iron delivery & filled up with £50 notes & sent to the UK ! :-)

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If anyone shows that my numbers are complete rubbish, I'll happily delete/modify this post. But fairly sure it is correct.

[smithie6] 29/1/2022 21:54

Zinc !
(the JV produced/recycled 6000 tonnes last year)

.".the Southeast Asia galvanized steel market is expected to grow at a CAGR of 13% from 2021 to 2028 to reach $24.21 billion by 2028. By volume, this market is expected to grow at a CAGR of 12.4% from 2021 to reach 25.89 million tons by 2028"

...a lot of consumption of zinc !
& expected to increase year on year in Asia. I doubt that the zinc from the JV site in Germany would be shipped to Asia (but who knows, ships going back there will want some cargo)

But if Asia is increasing its demand year on year that is good for hopefully supporting or pushing up the zinc price.
Zinc has doubled in price since the low at the start of the Covid crisis, straight line trend. :-)

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Main Uses/consumption of zinc.
"Corrosion-resistant zinc plating of iron {steel ?} (hot-dip galvanizing) is the major application for zinc. Other applications are in electrical batteries, small non-structural castings, and alloys such as brass."

Brass contains ~34% zinc & is used for plumbing fittings, lighting, electrical plugs/sockets etc.

3/4 of production of zinc is used for anti corrosion purposes. Galvanized steel. Lamposts etc.
Galvanising of steel car bodies/panels is probably the biggest use of zinc since it is X million new cars every year.

(Electrically heated 'immersion' hot water tanks made of steel all have a zinc sacrificial anode (perhaps 1/2kg of zinc), which is supposed to be changed every year ('cause it gets knackered/'eaten'). Such water tanks are very common in homes in much of the world).

Same applies for metal ships I think.
It is a process of loss of the zinc.

Use in electrical batteries is growing its consumption of zinc, one assumes. Electric scooters, cars etc.

(The process to make it from ore uses a fair amount of power so the recent rises pushes the price up, & there are no big ore sources in Germany or Europe. Which is good for the JV since production from ore is imo dictating the global price not the recycling producers. The bullish mood wrt the JV profits make me think the recycling process is a much cheaper method than producing zinc from ore. (Ok, zinc is only one of the JV's sources of profit).

[smithie6] 29/1/2022 11:26

The following is quite/very good imo, even though written in the past.

By Simon Thompson
Who has recommended HSP shares as a buy in the past.

And will surely give it coverage again, 'what I wrote might happen, is happening. More to come'

Free access.....perhaps just for 1 access. (So don't close & then try to re-open)



Somehow I managed to download an article written by Simon that is a pdf, I downloaded completely for free, (via a link at IC website I think) that is the best one to read even though it is officially out of date.

IC_Alpha_Hargreaves_Simon_190320.pdf

If you google search that on the web hopefully it can be downloaded free. Simon cleverly predicted in '20/'21 what could happen at HSP with the JV, & it is happening. Kudos to Simon T. (Posters on here probably/surely predicted the good possibilities as well; especially after the H2 results from the JV). But the price chart shows that the market took no notice, with the price falling back to 400p, nuts.

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The Daily Mail also tipped HSP on 22nd January.



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There is some useful or key info in the ST pdf file analysis (& it is a long analysis, a must read for any HSP fans imo) which is why I think this is an excellent share for the next 3-5 years relative to the current price (& after that, look again & at the price then). The increasing return to HSP of cash/loans from the JV, & one assumes the greater payout to HSP of 80% of the profit from the JV.
Also interesting to read the info/deals that HSP did for the tungsten mine in Devon. (They bought various assets & then sold them to make a good profit, & kept some assets & Tungsten West are now giving HSP £1m/year cash. Very sharp.
& with the success of the JV (with HSP funding/backing) the HSP dirs. look to be switched on deal makers imo. While yes in the past they have had notable write offs of receivables such as due to British Steel going bust.
The co. seems to be very successfully moving on.

[meijiman] 28/1/2022 21:17

Top posts . Many read but can't compete with your level of knowledge!

[smithie6] 28/1/2022 20:48

(oh no, another post.

"The US is on track to import 6.2mn t of pig iron in 2021, according to Commerce Department data. The additional capacity could grow that figure by 26pc as soon as 2022"

USA is opening back up steel production capacity. European production is expected to surely increase in 2022 as well as car production increase to try to catch up with the undersupply over last 2 years, & hire car companies are waiting for biggish deliveries I believe)

[smithie6] 28/1/2022 19:01

Apologies for too many posts recently.

Oops.

It's interesting for analysing with the JV & thousands of tonnes of pig iron & zinc & housing/land developments, unusual. And the co. news like 'materially higher on-going profits'. & it's exciting with the profit its chucking out ! (I've got a decent chunk of these)

I'll 'try' to avoid posting next week, unless I find something new/unique to post.

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Price target ?
>600p in < 10 trading days & perhaps by the end of next week. (+20-30p/day today & yesterday)

>700p in < 2 months

(& on-going imo, the mkt will take time to learn about the value of the JV, & that not being sold, & that the bod expects it to grow, 'more opportunities'; only a low % of possible investors have read the H1 accounts/news imo)

Movement might be pushed by any newspaper/tipster coverage or director interview or any good trading RNS, broker EPS upgrades etc; without those things it might be a gradual process, as new buyers take shares from any top slicers. Recent days have shown how it can move quite quickly, more left imo; & various others think the same.

[gargoyle2] 28/1/2022 18:10

You've certainly added quite a few times to this board, Smithie!

[smithie6] 28/1/2022 16:13

Is there a chance of another 3% jump at the open on Monday, same as yesterday & today ?

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& a good chance of press coverage at the weekend, interesting story I think, big increase in profit, jv in Germany reports £9 million PAT for just 6 months, company talks about material upgrades to short & medium term profits, change from selling the JV to keeping it, & that the JV sees opportunities , & !!
that the JV is trading so well HSP has lent it £15 million to help cover working cash & to return it in H2.

(I would add more but added quite a few times already !)

[smithie6] 28/1/2022 14:39

Pig Iron.

This is perhaps interesting, talking about scarcity of pig iron supplies in Eastern Europe & western Russia.

It does not mention supply situation in Germany, where the JV produces its pig iron. But if prices in 1 market area change it surely affects supply & prices in other regions, but with shipping costs providing some separation.

hxxps://www.metalbulletin.com/Article/5081879/Black-Sea-export-pig-iron-market-up-on-tight-supply-Turkish-demand.html

"Ukraine’s Metinvest doesn’t have pig iron [for the spot market], Russia’s Severstal has no pig iron until April [shipment], NLMK is sold out for February, and we have sold half of our March availability,” one exporter said."

[smithie6] 28/1/2022 14:13

I make it, 5k of shares reported as buy trades when in fact they were sells, (the more recent ones at 514p)

So, I make it
18k buy trades
83k sell trades

& yet the price is up & has not dipped once

How/why ?

Well, one option is that there are some bigger buy trades which won't be reported until after the close or on Monday.

[smithie6] 28/1/2022 13:12

Notable difference between what advfn thinks are the buy & sell volumes

Although recent 514p trades are listed as buys when they are surely sells.

Real mkt price is 514p-523p

(Phps a delayed reporting buy order balances the numbers ?; to look again)

[smithie6] 28/1/2022 09:50

Market maker

Interesting

The MM took a line of buys at 507-510p first thing....& then smaller buy volume at ~517p...with no matching sell volume...

MM moved the buy price up to 524p...price to sell at 502p, so a big 22p official spread..& buyers disappeared due to the price rise & the largish spread.....

& after a while some sellers did come out of the woodwork....
....& the MM picked up enough sell volume to match the earlier buys & at 510p, so the MM was about level.

Nice work from the MMs I think. They provided trading volumes & smooth mkt operation even though the buy/sells were very unbalanced for the first 30 minutes, (& the MMs didn't make any profit, which will get applause from us PIs, since normally they make ~3% on every pair of buy/sell trades, often just in minutes)

[smithie6] 28/1/2022 08:37

Strong upwards price action straight from the open today.

:-)

[scobak] 27/1/2022 19:40

I am sure that Simon Thompson will make some relevant comment in his IC column in the next couple of weeks. He has been a great advocate of HSP this last year and his figures are usually close to the mark.

[castleford tiger] 27/1/2022 17:24

Over 500 now

[smithie6] 27/1/2022 13:22

>=£20 million/year PAT from the German JV, 80% owned by HSP I think.

In the future, it equates the ability to pay 50p/share divi on its own !, once JV bank loan covenants allow the JV to pay out more cash, +7p 'HSP' divi =57p !!

(About £16-25million reduction this year in the bank debt of the JV (retained profit after paying divi to HSP & themselves), so the JV bank debt must be reducing quite quickly imo)

I assume that there will be some millions in depreciation which is not a cash charge although it is a charge used in the profit calculation. (So the cash generation is higher). The carbon pulverisation plant is shiny & new, so there will be a depreciation charge for it in the accounts of the JV. I dont know if the pig iron, zinc equipment has some years of age & is already fully depreciated, I assume yes. (Who knows, the machines inside the old looking building have probably been modernised/updated, they produce X hundred thousand tonnes of pig iron, & 6k tonnes of zinc , big numbers, so the machines probably need updating/renovating every year, so perhaps there is a depreciation charge (included in the PAT calc. but excluded from EBITDA calc.)

If the JV produces >£20million/year PAT (already in the bag imo, trade is up, zinc sales 40% of annual sales, foreward price is agreed), I wonder what the EBITDA is ?! Even more impressive, g'teed !

(The £9million PAT is with 40% of subsequent annual sales for zinc hedged/g'teed; 40% of annual 6000 tonnes, so, virtually all of H2 sales of zinc are at pre-agreed price (so the zinc profit in H2 is mostly g'teed/known, as long as the agreed quantities of zinc are made/provided). Zinc prices are notably up, so, when this hedge expires or any new hedge is taken out the price for new sales (& the profit) should be higher. :-)

[smithie6] 27/1/2022 10:53

Cap. Value is ~150 million.
If German venture clocks in £20 million PAT for the year (9 in H1, I'm sure it will be higher) & pays ~£5million in divi (to incl. to 20% holders) that is £15/year retained profit. If repeats for 5 years that is £75 million retained profit. 80% of JV owned by HSP, = £60 million. Add 80% of current assets value of ~100million (5 x annual PAT as real asset value, it makes ~£20 million/yr PAT !!), £80 million.

80+75 = £155 million
About the same as the current cap. value, "just" for 80% of the German JV !
You get the rest of HSP for free !!

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I have only done outline calculations & I am sure that someone else could do a much better job (a correct DCF analysis ?) but my calcs. are good enough to highlight/prove my point I think. (That the asset value of the German JV is perhaps largely ignored from the valuations of the HSP shares). Up until yesterday the company plan was to sell the JV & no one had any idea of its value & how many years it might be until it was sold. Yesterday the plan changed to not sell it, & the profit is up, & trading is up. But as well as the profit there is a notable change to the HSP NAV imo.

[smithie6] 27/1/2022 10:39

Advfn & lse show a fall in HSP price.

But in reality the price is grinding up, sell trades now going thru at 481p.
Gonna grind upwards today imo.

[smithie6] 27/1/2022 10:33

reminder of some text about the recycling function

(big numbers,
Sells about 285 thousand tonnes of pig iron !!, & 6000 tonnes of zinc (price is up, about 3800$/tonne at present I think. = 22.8 million $ !! only for the zinc, then add for pig iron; and of course deduct any costs for buying the waste, transport, operating costs, etc )

Big numbers.

"The plant takes around 500kt of waste material from the steel manufacturing industry in Germany and recycles it into 285kt of pig iron and approximately 6kt of zinc per annum. That waste material would otherwise go to landfill"

[smithie6] 27/1/2022 10:23

"Barriers to entry".
A popular term in investing.
Well, the German venture has massive barriers to entry to "new" competitors imo.

To set up in that region of Germany, to be close to the producers of waste slag from steel production, you would need deep pockets (100-150 million € ??) to build a new plant & a big piece of land ( 50 hectares ??, = X million €) with a train line spur in to it. (the land needs to include the train line spur & filling/emptying zone(s)).

And clearly the set up costs , including spur train line (including signalling, safety certification of that signalling....) would be some millions of €.

Happily the processing can not be done in Asia/China, with its lower labour rates, due to the transport costs.

So, some benefits/barriers for the German venture imo.

[smithie6] 27/1/2022 10:13

"Volumes traded in the first six months of the financial year were 750kt across all products, compared with 415kt in the comparative period. In addition to the increased volumes, margin has also improved, particularly on sales of pig iron, which have seen a sustained increase in pricing throughout the period. As pricing and volumes have increased, so has the demand for working capital within HRMS. To support HRMS in capitalising on the current market conditions, Hargreaves has provided a temporary GBP15m loan which is due for repayment in the second half."


3/4 million tonnes !!!!!