 Shares Magazine 13/02/2025 :-
Great Ideas: Investments to make today
Hargreaves Services is hard to ignore despite its strong performance
Patient shareholders could almost double their money on some forecasts
Hargreaves Services (HSP:AIM) 620p
Market cap: £200 million
It’s always a test of our conviction if we can recommend a stock just as the shares are touching a 12-month high, but in the case of environmental services, property and materials group Hargreaves Services (HSP:AIM), its shares are trading at a 10-year high. In our defence, we did flag the company a year ago at 475p in our ‘Five small-cap stars to buy today’ feature, so we haven’t just stumbled on the idea recently, and although the shares have racked up a decent gain since we believe there is much more to come.
AN ASSET-BACKED STORY Hargreaves is made up of three fairly unglamorous but profitable businesses – Services, which includes earthmoving, transportation, recycling and wasteto-energy; Land, which mainly entails preparing
and selling plots to housebuilders for development; and HRMS, a German materials recycling business.
As we said a year ago, this isn’t a go-go growth story, it’s an asset-backed income play, by which we mean there is a steady revenue stream from the services business, periodic revenue from the sale of sites from development and now a steady stream of dividends from the German subsidiary. All three operations are ticking over nicely, but the kicker is the land and the German business are in the books at extremely low valuations and in time, as the assets are realised, there will be a substantial return of cash to shareholders. In a time when markets are at the whim of politicians, there’s a lot to be said for owning a smaller, under-the-radar company which minds its own business, pays a dividend of around 6% per year (which was 7.5% a year ago, for the record) and offers the potential for substantial capital returns.
SO FAR, SO GOOD Looking at the group from an operational point of view, the results for the first half to the end of November last year show significant progress financially and strategically. Services revenue and EBITDA (earnings before
interest, tax, depreciation and amortisation) grew by double digits to £125 million and £15 million respectively, the Land business began marketing seven sites for renewable assets on top of its housing plots, and HMRS returned to profitability.
The Services business enjoyed strong growth thanks to additional earthmoving activity, which is to be sustained throughout the year with 65 term and framework contracts in place and 90% of revenue already secured.
The HS2 contract, the group’s largest, has been operational for three years and there are at least two more earthmoving ‘seasons’; to come, while work at Sizewell B saw ‘a substantial uptick’ in the first half.
Looking ahead, there could be two major projects in the pipeline – the Lower Thames Crossing looks like it is going ahead, and the Labour government has re-floated the idea of a third terminal at Heathrow, where Hargreaves was involved in consultations some years ago when it was first mooted.
The Land division has sold six plots at Blindwells in East Lothian, just 12 miles from Edinburgh city centre, with another 80 acres remaining in phase one, and 90 acres awaiting planning permission in phase two.
Meanwhile, seven renewable energy land assets are being marketed with a total value of up to £13.5 million, and the firm has further land worth the same amount again, with permission to build a 500 megawatt battery energy storage scheme.
HMRS posted a first-half profit of £0.1 million against a year-earlier loss of £1.9 million due to cost reductions while pig iron prices have ticked up due to EU sanctions on Russian imports and gate prices for incoming recycling materials have been raised.
THE BEST IS YET TO COME At an operational level, the strong first-half results have spurred a round of upgrades to 2025 and 2026 revenue and earnings forecasts, mainly at the Services business, adding to the mediumterm valuation upside. The company is moving to a capital-light model, which means no acquisitions and no equity raises, and as it already has a net cash position it will start returning surplus capital to shareholders. Analyst Greg Poulton at Singer Capital Markets estimates the firm could return up to £150 million of capital – consisting of £80 million from Land and £70 million from HMRS – which is equivalent to three quarters of its current market cap, while the Services business continues to throw off cash. Meanwhile, Shares has seen various sum- of-the-parts valuations suggesting the shares could be worth between 900p and 1,200p in the medium term.
With the stock paying an annual dividend of 36p, or roughly a 6% yield at the current price, income seekers can afford to sit and wait for the cash to roll in. [IC] |
First-half revenue up 14 per cent to 3125mnPre-tax profit has doubled to £5.3mnNet cash (excluding leasing debt) of £15.7mn18 per cent EPS upgrade to 2025-26 forecastsInterim results from Hargreaves Services (HSP:600p), an industrial group and land developer, highlight the benefits of having a diversified revenue stream.The group's services division, which provides critical support to many core industries (mainly energy, environmental and UK infrastructure) through the provision of mechanical and electrical contracting services, logistics and major earthworks, was the standout performer. Buoyed by additional contract opportunities on earthmoving projects, notably HS2 and Sizewell C, divisional pre-tax profit increased 13 per cent to £8.8mn on 10 per cent higher revenue of £121mn to account for all group profit. Moreover, with 90 per cent of full-year revenue already secured and growth in the order book underpinned by a raft of contract wins, joint house broker Singer Markets upgraded its full-year contribution from this business by £2mn to £14.5mn.Read more from Investors' ChronicleThe European drinks brands benefiting from a market shiftWhy shipbrokers Braemar and Clarkson are defying pay normsThe black sheep of the FTSE 250 deserve a second lookAnother key focus is to realise the value of land assets, in particular at the Blindwells flagship site east of Edinburgh. In the first half, the land division completed the sale of seven acres to Places for People for £3.1mn and subsequently sold 11 acres to Avant Homes for £9.3mn. A third parcel had been expected to complete before the year-end and reap a £2mn profit, but has been pushed back to the new financial year due to transport planning delays.So, although analysts are maintaining their flat full-year group pre-tax profit estimate of £16.6mn, they upgraded 2025-26 forecasts by 18 per cent to £20.5mn to reflect a trebling of the land division's profit to £6mn and a £1mn higher profit contribution of £14mn from the services unit. The outcome could be higher still as Hargreaves is marketing for sale seven renewable energy assets which are held in the accounts at less than £4mn and could realise £13mn, highlighting the hidden balance sheet value. A further £15mn of renewable assets are earmarked for disposal, too.Hargreaves' shares have delivered a 235 per cent total return (TR) since I initiated coverage (Alpha Research: 'A high yielder offering significant hidden value', 19 March 2020), but still trade on a deep discount to sum-of-the-parts valuations of 850p (Cavendish) and 813p (Singer Capital Markets). Rated on undemanding forward price/earnings (PE) ratios of 14.1 (2025) and 11.6 (2026), and underpinned by a 6.2 per cent dividend yield, they rate a buy. |
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