Hargreaves Services Share Discussion Threads

[simon gordon] 28/2/2013 16:00

Hargreaves Services downgraded by Panmure Gordon

28th February 2013, 15:35

Panmure Gordon has downgraded its recommendation on Hargreaves Services [LON:HSP] to 'hold' from 'buy' as the stock breached the brokers target price.

The City broker has left its target price unchanged at 799 pence a share.

Shares in Hargreaves have risen by almost 20 per cent in the past month.

"A messy set of first half results from Hargreaves given the issues at Maltby and Belgium, though we hope much of this now behind it," analyst Paul Jones said in a flash note.

"That said, Tower has also been behind schedule given bad weather, but looking at underlying performance we believe Hargreaves is (largely) on track after a challenging period.

"After a significant recovery in the share price during the last month and no change to our on-going assumptions, we change our recommendation from buy to hold." At 3:33pm: Hargreaves Services share price was up 36 pence at 860 pence.

[aishah] 28/2/2013 15:45

Panmure downgrades - tp=799p

[bigbertie] 28/2/2013 13:43

Some positive stuff here but also some worries
The scale of the Belgian fraud is a worry. Presumably the company concerned is the one listed in the annual report as 82% owned in 2012 (62% in 2011)? If so HSP would control it and be able to set financial reporting & control policies. Presumably too it would be subject to independent annual audit. How did things go so wrong? And given the large number of subsidiaries which HSP has, are we sure that there is tight control in all the others?
Also the Hatfield landslide - is there any risk of some of the liability being borne by HSP?
Also Hatfield and Tower show that coal mining is affected by bad weather. Could we have more?
On the other hand my long-term graph is very close to making a golden cross....

[simon gordon] 28/2/2013 10:53

Dave,

Cheers.

If you happen to come across WH Ireland's view could you post it.

Thanks

[davebowler] 28/2/2013 10:35

Westhouse;
HSP.L / 824.0p / £226.5m / TP: 927p


Hargreaves Services interims to Nov 2012

Hargreaves' interims are complicated by the exclusion of the loss on Maltby (some £9.8m in the first half, in line with our expectation that the majority of the full year loss of £10.4m would be incurred in the first six months.) Given this, we suggest the best way to look at the profit performance is the ex-Maltby loss, underlying operating profit which rose by 6% to £24.6m. Our EBITA forecast for the full year is £45.5m, including a £10.4m loss from Maltby, meaning that the full year equivalent of £55.9m is our underlying EBITA forecast for the business, which has delivered 44% of this total in the first half, in line with the split achieved in 2011, which is reassuring.

On this basis, our current forecast appears achievable. However, we raise a number of points on the statement:

Positives

E&C: commentary on trading is positive, with a strong performance in UK and a steady performance in Germany. This key division (56% of EBITA last year) grew EBITA by 8% to £13.9m in the first half (ex the Belgium exceptional).
E&C has also won a new contract with a major power generator to supply one million tonnes of power station coal.
Tower contributed over £2m to operating profit in the first half, and we continue to believe that our £6.5m JV contribution in the current year is achievable, notwithstanding the challenging recent weather.
Strong power station volumes and the first significant shipments of coking coal for the Redcar steelworks also bode well for the second half performance of E&C this year.

Negatives

Production appears to have weakened due to the poor weather at the Tower colliery (as we highlighted in our note of 22 January), although management note that they remain on track to satisfy the contractual tonnages for the first year of our three-year thermal coal contract with RWE.
Coke contracts are in place for Monckton, with the exception of approximately 40,000 tonnes for which management note that negotiations are well advanced.
The pre-exceptional charge of £19m for the Belgian fraud, is greater than the c.£15m write down expected by management in December.
The fall in underlying E&C operating margin from 6.4% to 5.7% reflects the mix impact of increased volumes and hence a higher proportion of lower margin sales of power station and coking coal. However we model a modest fall of 30bps in the margin for the full year to 6.5%, which may yet prove realistic.
Net debt has risen by 36% to £106m, although net debt / EBITDA was only 1.5x at November (comfortably below the 2.5x covenant). Main drivers were coking coal purchases that added to the normal seasonal increase in working capital. This was partially offset by a number of advance payments from customers. We wold also expect capital realisations from Maltby to take place in the second half, and a further reduction in net capex that could also prove beneficial.

Valuation and Forecasts: At this stage we believe that it is still possible for HSP to achieve our 2013 underlying EBITA of £55.9m given the normal variation in profitability between the first and second halves. This would suggest that the shares are trading on an underlying P/E for the current year of only 5.8x, despite a strong (25%+) performance by the shares year to date. We will review our forecasts with management, especially on the points of the Tower full year contribution, and the uncontracted 40,000 tonnes at Monckton.

[simon gordon] 28/2/2013 07:53

Some good growth indicators in the statement. Hatfield seen as quickly sorted, no impact. Cry me a river.

[gingerplant] 28/2/2013 07:23

Results out (note - not on Investegate yet).



"The Group, as expected, is trading strongly through the first three months of the second half and, excluding Maltby and Belgium, results are expected to be in line with management's expectations.

The underlying profit before tax in the first half was £22.7m compared with £20.8m in the comparative period. Underlying operating profit in the first half increased by £1.4m from £23.2m to £24.6m. As has been typical in recent years, we expect to see a strong weighting to the second half of the year. Strong profits from coal trading in the UK offset weak production at Tower Colliery due to the unprecedented levels of rainfall that persisted from the spring through to December 2012."

Looks to me like ongoing eps should be around c.136p, net working capital almost £5 per share, NTAV c.457p per share. It's worth closer to £11 IMO but may take a while.

[simon gordon] 28/2/2013 05:59

New Civil Engineer:

Landslides, track breaks and climate threaten rail

28 February 2013 | By Claire Symes

Landslide knocks line out for at least two months


Extent of problem: The vast mine waste tip moved the railway horizontally and vertically as it slipped

Owners of a south Yorkshire colliery were this week facing a substantial compensation claim from Network Rail after it emerged that a landslip had closed a key section of railway for at least two months. A pile of colliery waste suffered a rotational and translational failure twisting the line vertically and horizontally.

The effect of the landslip at Hatfield Colliery was first noticed on 9 February when a train driver on the Doncaster to Goole line reported a "rough ride" through the area. Network Rail started to monitor the situation before suspending rail services on 12 February.

The slip worsened considerably over the following 24 hours leaving the trackbed heavily deformed.

Network Rail said that it will take eight weeks to repair the damage to its track once Hatfield's owners have remediated the collapsed spoil heap embankment. In the meantime, passengers are using a replacement bus service.

But mining company Hargreaves, which is managing the site, told NCE this week that it had still to work out a recovery plan. It wants to let the slip settle naturally before attempting any remedial work.

Hatfield is currently owned by a group of banks that is owed money by previous owner Powerfuel which went into receivership two years ago.

Hargreaves operates several of its own collieries in the North East, and expressed surprise at the slip. The spoil heap is up to 30m high and has been built up over a number of years, but is no higher than other spoil heaps on the site that show no sign of movement.

"As far as we know, there have not been any major stability problems at Hatfield in the past, although minor ground movements are common in most spoil heaps," said a Hargreaves spokesman. "Some other spoil heaps on the other side of the Hatfield site are up to 40m high and show no sign of stability problems."

The spokesman confirmed that Hargreaves is working with external civil engineering consultants to find a solution for the site but declined to name which companies are involved.

The Health & Safety Executive has accepted the consultants' advice to allow the collapse to settle naturally and reach equilibrium before starting remediation work.

"The movement is being monitored around the clock and this suggests that the slope is reaching a stable situation," added the spokesman.

"Once the slope has stabilised we will be designing a major earthworks programme, but it is not clear at this stage whether this work will focus solely on the collapsed section or extend to the rest of the spoil heap adjacent to the railway," he said.

"We hope to have a clearer picture by the end of the week."

Images of the landslip have been analysed by Durham University Wilson professor of landslides Dave Petley who believes heavy rain and the local geology may have played a part in the collapse.

"It would be surprising if the heavy rainfall levels we have seen over the last year were not a factor," he said.

"It is an interesting landslide with both rotational and translational failures."

"The local geology maps show that the tip has been constructed over a layer of alluvium and I believe that the failure started in this layer," he added.

"This lead to the ground under the railway moving forward as the heap shifted downwards.

"The toe of the landslide is now acting as a counterweight to the main slope." Petley suggested that any earthworks will have to start from the top of the slip. "It will be a challenging remediation," he added.

A bus replacement service is currently running between Doncaster and Goole stations. Closure of the line is estimated to be costing Network Rail around £500,000 a week in fines.

However Network Rail has said that responsibility for the slip lies with the colliery's owners and that they will be liable for the costs of the closure.

[castleford tiger] 27/2/2013 17:55

Took some out today. may live to regret it but over 200p was too much to gamble.
Any fall and i may come back.
Just felt a bit nervous about it.
A

[simon gordon] 27/2/2013 17:29

Interims tomorrow.

Jeffries out with a buy and 1000p target yesterday.

[simon gordon] 25/2/2013 18:14

I had a sniff around the City today and the view is:

1. Liability will lie with Hatfield Colliery Limited.

2. Public Liability Insurance will cover the cost.

It is a black and white view.

[castleford tiger] 25/2/2013 17:25

I am holding.
My take is that HSP would have told the market by now if it was their problem.
Failing that it would have leaked and the shares slipped.

Its a big call...........

Tiger

[jamielein] 23/2/2013 12:17

I originally sold at 740 on hearing the news and bought back a few days later at 780 as I decided I had made a mistake.

I'm hoping that this wont have a huge impact, as they're still undervalued as long as they aren't liable for the landslide.

[simon gordon] 23/2/2013 11:46

Jamie,

Do you continue to hold?

=====

Tiger,

What's your take, you still holding?

[jamielein] 23/2/2013 11:37

All of these stories appear to have no impact on the share price. The only explanation is that somebody is accumulating a lot of shares. I'm sure there'll be an RNS on Monday or Tuesday.

I think we'll have to wait for results to see what impact this will have on HSP.

[jamielein] 21/2/2013 11:26

Yet surprisingly the share price has held up quite well, which I see as a positive sign. Given that the uncertainty is 'known uncertainty', it's likely to already be factored into the price. I think there's still someone buying into all of these sales, and if the sales stop then the only way is up. Alternatively the buying stops and the only way is down!

[spooky] 21/2/2013 11:23

I have taken advantage of the strength in the share price over the last few days to sell my shares, i am not happy about it but rather like Simon Gordon i am being cautious. I can't see how the people running the mine are not responsible for this incident, i would expect Hargreaves to be liable, i would stress that this is only an educated guess.

[simon gordon] 21/2/2013 11:09

Possible scenarios:

1. Landslip stabilises, new rail line completed = 3 months. Cost = £10m.

2. Landslip has broken the geology (swamp / bog) and it needs months to drain, new rail line completed = 6+ months. Cost = £20m+.

3. Landslip has made geology unfit for a rail line, new route has to be built, new rail line completed = 8+ months. Cost = £30m+.

The above timelines and figures are pure speculation on my part!

This could turn into a real black hole with a lot of litigation.

[simon gordon] 20/2/2013 16:16

Jamie,

I sold my holding today.

I plan to sit back and watch what happens.

I've got no probs about buying in higher once this uncertainty clears. I think the landslip story is becoming more uncertain and expensive, hence my selling.

Sods law it will spike higher next week, but as a buyer is around and liquidity is strong I felt I should bank my profits.

I still like HSP as a trade at the right time.

Good fortune.

[jamielein] 20/2/2013 15:56

Hopefully they would have released an RNS by now if there was any material cost.

Someone has been offloading chunks of 10,000 shares today - but someone else is absorbing all of the sales, which gives some confidence.

Do you still hold?

[simon gordon] 20/2/2013 14:41

Jamie,

I didn't have a feeling after speaking with him, I just got some answers to my questions which I relayed on here.

It was when I looked at Google satellite that I started thinking this could be an expensive accident and put in doubt the viability of the mine. Today's report in The Star gives more insight into the financial aspect.

Negligence would mean lawyers and uncertainty dragging on for ages.

This is a tricky one to work out.

[jamielein] 20/2/2013 14:16

Thanks simon,

When you spoke to the CFO what was your feeling? I think it's unlikely they've been negligent, which would be the worst case scenario.