Hargreaves Services - Interim Results

The first set of numbers from this one since I acquired a position look to be reassuring and in line with the investment case I outlined in my previous post. Here is a link to the full announcement but my take, for what it's worth, is as follows.

The headline figures look good with T/O and Operating profits up 28% and 25.1% respectively. Underlying PBT was up by 22.3% but underlying diluted eps was only up by 7.4% as the weighted average diluted number of shares in the period increased from 27.8m to 33.2m following the equity raise in May 2013 which funded the acquisition of the surface coal mining assets in Scotland. The tax charge declined from 27.3% at the last year end to 23.2% in these numbers reflecting
the fall in the UK corporation tax rate from 23% to 21% and the exceptional goodwill write-off last year that was treated as non-deductible. Operating margins fell slightly from 6.9% to 6.7% reflecting a significant increase in lower margin volume activity in Energy & Commodities (E&C) offset to an extent by increased margins across the other divisions; most notably Production where a full six months of Tower supported the Division's result. 


The other significant feature as far as I am concerned is the dividend which was up by 27.5% to 8.8p. This is in line with their progressive policy and aim to reduce cover to 4 times which they announced last year. This rate of increase would, if they keep it up, put them on track to roughly double the dividend in the next three years or so.


In my last note I said I wanted to keep an eye on the debt level as a result of the Scottish deal. In these numbers net debt increased by £17.3m from £77.9m at 31 May 2013 to £95.2m at 30 November 2013. The net debt figure has increased in line with working capital movements and also reflects the deconsolidation of the German debt which was £10.2m at the point of change in ownership. This does not seem too large in relation to the £280m market cap. Other metrics on this that they quote in these result are gearing (measured as net debt compared to net assets) at the end of November 2013 was 68%, compared to 66% at 31 May 2013, interest cover of 14.5x and net debt at 30 November 2013 equal to 1.4 times earnings before interest, tax, depreciation and amortisation ("EBITDA") pre exceptional profit, comfortably below their maximum covenant levels. So the balance sheet is geared but not excessively so I would say.

Current trading and the outlook for the second half were the other things I wanted to keep an eye on. On this they reiterated that the closure of Maltby Colliery together with the expansion of the Group's surface mining activity has reduced the capital intensity of the UK business and has increased the stability and predictability of their cash flows. They also stated:

 "With the combined strength of our coal distribution business in the UK and our newly established surface mining business, the Board is confident that the UK business model is robust and well placed to deliver even as coal burn reduces in years to come. This strong foundation provides the Group with a platform and time to expand into new and related energy and energy services markets both in the UK and internationally.Our management team continue to work hard in a dynamic and challenging coal market. Although there remain plenty of risks and issues to be navigated, we are very encouraged by the breadth and depth of the potential opportunities."

The Board remains confident of achieving its expectations for the full year and they seem to be looking to reinvest the cash flows from the declining coal business into other global service type operations such as the five year integrated maintenance services contract at Castle Peak Power Station in Hong Kong with China Light and Power. They also flag their success in deploying services at the three largest UK steel plants and suggest this is an area where they could also look to supply their services internationally.

So overall conclusion is so far so good and no unpleasant surprises in these numbers. However, obviously it is not without its risks and there could be some hiccups along the way. Nevertheless the outlook seems OK and the dividend is progressing as I hoped so I'm happy to stick with this one.