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 waste-to-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 expected 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 medium-term 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.
These articles are provided by Shares magazine which is published by AJ Bell Media, a part of AJ Bell. Shares is not written by AJ Bell.
Shares is provided for your general information and use and is not a personal recommendation to invest. It is not intended to be relied upon by you in making or not making any investment decisions. The investments referred to in these articles will not be suitable for all investors. If in doubt please seek appropriate independent financial advice.
Investors acting on the information in these articles do so at their own risk and AJ Bell Media and its staff do not accept liability for losses suffered by investors as a result of their investment decisions.
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