Swapping stamps for coal.

Further to my recent post about Cashing in my stamps where I sold one of my stocks on a 20x P/E and a sub 2% yield, this is where I found a more attractive P/E, yield and dividend growth combination.

It is a sligihtly strange one Hargreaves Services (LON:HSP) which describes itself as follows:

Hargreaves Services plc is a holding company. The Company is engaged in the provision of haulage services, waste transportation, mineral import, mining and processing, together with coke manufacture and related activities.

It breaksdown as follows:

Divisions by T/O £m, Op. Pr. £m, Op. Margin %
Production 103.2, 16.7,16.2%
Energy & Commodities 585.0, 31.9, 5.5%
Transport 82.7, 4.0, 4.8%
Industrial Services 149.3 3, 2.0%
 
This gives an overall operating margin of just over 5%, although in the past it has been over 7%. So probably dull enough to be on a low rating which indeed it is. According to Stockopedia it is on around 6x with a 3% yield on a 12m forward basis and has a value rank of 95 (100 = best) so it ticks the value box.

In their  most recent H1 pre close trading update in December they indicated that trading was in line with their expectations and they were well placed for a strong second half. So It looks as though the H1 results due on 11th February 2014 should be OK, but will be interesting to look for any updates on demand for coking coal from their steel customers and the outlook for H2.

In last years results they made an interesting shift in their dividend policy as follows:

In view of the strong underlying performance from Continuing Operations the Board has confidence in recommending an increase of 15.3% in the final dividend from 11.8p to 13.6p. This will bring the dividend for the full year to 20.5p compared with 17.8p in the previous year, an overall increase of 15.2% for the year. The proposed final dividend will be paid on 12 December 2013 to all shareholders on the register at the close of business on 8 November 2013.

 The Board believes that the Group's dividend cover remains conservative. The average dividend cover over the past three years has been set at between six and seven times.  The closure of Maltby together with the expansion of the Group's surface mining activity reduces the capital intensity of the business and increases the stability and predictability of our operating cash flows. The Board has therefore set a target of increasing the dividend payout progressively over the next three years towards a dividend cover of around 4 times.

So this gives some scope for the dividend to increase nicely if they can also increase the earnings going forward. Taking a look at the estimates I see on digital look that they have an eps figure of around 160p and a dividend of nearly 40p three years out, reflecting the 4x cover target above, I do note however that the historic figures there are on a UK GAAP basis including discontinued activities and are therefore higher than those shown on Stockopedia. However, on the next two years numbers both are in the same ball park. Talking of more tangible historic numbers I note that the dividend has compounded at the rate of around 15% since 2009. 

Now this makes looking at historic valuations a bit tricky as the historic PE has either been around 6 to 10x or 8 to 14x. An average of the two is 8x to 11x which probably feels about right for what is likely viewed as a mature stodgy business. Yield on the face of it might be a better way to go on this one and it has traded on relatively low yield which has grown quite nicely in recent years ranging between 1.2% and 3.4% according to Stockopedia, or an average of 2.3%. I guess it might move onto a higher yield as the cover comes down but IF the dividend does nearly double (as suggested by forecasts - but who knows) in the next three years then the shares should do pretty well. It also has some good institutional names on the list as major holders behind the Chief Executive who is the biggest holder at 9.2%. These include Odey, J O Hambro, M & G, Fidelity and finally Hansa,  a trust I wrote about recently which prompted me to research this one.

So taking those numbers again of 160p and 40p approximately three years out 8x would give a 1280p target and 3.4% yield on 40p would be 1176p which represents 50% and 40% upside from my recent purchase price. Interestingly the high price in 2012 was just over 1200p. The fall in the price since then I think reflects the fact that they had some accounting irregularities and resultant write off's in a Belgian operation and problems at the Maltby Colliery, both now discontinued and hence the difference in the historic numbers. 

If they can deliver the forecast earnings and rebuild their reputation then maybe it could get back nearer to the higher end of the recent P/E range, then the price could double. Or if the earnings disappoint and it stays on a 5 to 6x rating it might just sit there like a pudding or sink further, recent lows have been closer to 600p in 2012 and 700p in 2013.

Financially it is not too highly geared with net debt of £77.9m at the last year end versus a market cap of £287 although they have done a placing and acquisitions since then so will need checking at the results next month. Pension liabilities are also not too bad having reduced last year to £3.6m. Otherwise it is a fairly low margin business but with some good ROE and ROCE numbers with quite a bit of green on Stockopedia screen. I also note it qualifies for a couple of momentum based screens on the basis of earnings surprises, although the recent earnings trend seems to be negative over the last 3 months - not sure how that works - guess we'll have to wait and see if the interim surprise or not? So if you want to get your hands dirty in a boring grubby value stock that has had some issues, it may be worthy of your consideration.