I was right to be bullish on the prospects for Hargreaves Services (LSE: HSP) in an article a year ago.
Back then, the small-cap’s share price was near 270p and after that, it rose to around 570p by August 2021. However, it then dropped back to lows near 380p in December 2021. And now, after shooting up this morning on the release of the half-year results report, the stock price is about 480p as I write.
An improving business
There’s some risk for investors in the move higher today because the valuation won’t be as keen as it was. But the main thrust of my old article was I couldn’t understand why the valuation was so low given the robust-looking prospects of the business. Hargreaves had been trading well and forecasts for improved cash flow, profits, debt-reduction and revenue growth were all bullish.
It seems the stock market began to form a similar opinion as it re-rated the stock higher. But today, my view is similar to last year’s given the ongoing news flowing from the company. I still think the valuation looks too low. And the market isn’t fully recognising the growth story emerging from the carcass of the company’s old set-up and its historical business.
Hargreaves describes itself as a diversified group delivering key projects and services to the industrial and property sectors. And today’s report contains some impressive figures. Earnings per share rose by 812% compared to the year-ago number. Net debt plunged by 85% to £3m. And the net cash figure ballooned to £8.5m after the company posted a net debt position of £8m last year.
Something is clearly going right for the business. And the directors kept positive momentum going for shareholders by increasing the interim dividend by almost 4% to 2.8p per share. However, ordinary dividends aren’t the only source of shareholder income from this company. The directors intend to continue to pay additional dividends relating to income from the firm’s German joint venture, Hargreaves Raw Materials Services (HRMS).
Diversified operations
HRMS supplies specialist raw materials to European customers in several industries. And profit after tax from that business rose to £9m from just £0.9m last year. It was to HRMS that Hargreaves previously sold its coal assets. And that’s why revenue to Hargreaves decreased by just over 17% “as expected” after exiting direct involvement in the coal business in December 2020.
Elsewhere, profits also increased. The Services division is building a “sustainable profit stream” with stable term contracts and framework agreements in the energy, environmental, infrastructure and industrial sectors. And the Land division focuses on maximising the value of its existing portfolio as well as developing a strong pipeline of new opportunities. Part of that is a renewable energy land portfolio.
The directors’ expectations “increased materially” for the current and future years. And with the share price near 480p, the price-to-asset value is just over one and the forward-looking dividend yield is above 4%. There are no guarantees for shareholders. And the value proposition isn’t as compelling as a year ago. But I think the potential in the business could lead to further gains in dividends and the stock price in the years ahead.
