Yahoo Finance Questor: this Durham company yields 7pc and earns £7m a year from Germany
While artificial intelligence, technology, biotechnology and so-called momentum stocks are still all the rage, this column’s desire to march to a different beat and dig out deep value is bringing its rewards.
If taking a good look at stocks that trade at or below book value may seem like it harks back to the 1930s and Benjamin Graham, Warren Buffett’s mentor, then frankly that’s all well and good. It worked for him and the initial returns from names such as Just Group, MJ Gleeson, Beazley, all studied from this “value investing” perspective, bear close scrutiny.
Another candidate is now popping up on our screens – Hargreaves Services. The Durham-headquartered company looks like another asset-backed play for the portfolio.
Hargreaves Services derives the majority of its revenues from its infrastructure arm, where it provides mechanical and electrical services to major water and electricity utilities, as well as earthmoving and raw materials handling, in the UK, South East Asia and South Africa.
The company also has a 9,000-acre bank of brownfield land, which it regenerates and sells to developers for a range of uses, including warehouses, renewable energy projects and residential development. Finally, it owns 49.9pc of the equity in HRMS, a German raw materials and recycling operation where Hargreaves has the right to the vast majority of the profits.
Over 60 framework contracts, including those on the Lower Thames Crossing projects and Suffolk’s Sizewell C nuclear power plant, provide good visibility of earnings, even if the timing of land sales can be unpredictable and revenues lumpy, while cash returns from HMRS are expected to run at around £7m a year.
A steady improvement in the housing market could boost the land business, too, although Hargreaves Services is also in the self-help business.
Following a deal with Just Group, which will provide an insurance policy in exchange for a lump-sum cash payment, Hargreaves Services no longer has to pump cash into its two “defined benefit” pension schemes at the rate of £1.8m a year. That further buttresses an already solid balance sheet and frees up cash that can be used to invest in the core operations, and especially land, as well as pay dividends.
Hargreaves Service has already declared an 18p-a-share interim dividend and analysts expect the final dividend to reach the same level, for a total which equates to a yield of more than 7pc, more than one times covered by forecast earnings and backed by an asset-laden balance sheet.
Such a sum means investors can wait patiently for Hargreaves Services to maximise returns from its multi-year infrastructure deals and land bank and persuade the market that its market value, £163m at the time of writing, looks low relative to shareholders’ funds, or net assets, of £198m, or 605p a share.
Questor says: buy
Ticker: HSP
Share price at close: 498p
Update: AG Barr
Acquisitions that are bedding down well, a cooling of input cost inflation and future profit margin benefits from an investment programme in production and the supply chain all mean that AG Barr is showing growing profits and dividend with the prospect of more to come, especially as the drinks specialist has a net cash balance sheet.
Granted, this good news has been a long-time coming from the Cumbernauld-based company, which has a market value of £652m. Carbon dioxide shortages, sugar taxes and the pandemic have all tested management, not to say Questor’s patience, but our 6pc capital loss will be all but offset upon receipt of the final dividend of 12.4p a share on 7 June. This takes our total dividends received from the FTSE 250 constituent to 64.4p a share.
Better still, it feels like the company is coming through the worst.
Last month’s full-year results to the end of January show renewed like-for-like sales growth, a double-digit percentage operating margin and return on capital employed, as well as positive free cash flow. Better still, margins could start to expand once more as investment in efficiencies, the purchase of Boost and a reorganisation of how independent retailers are supplied help to fortify core brands such as Scotland’s iconic Irn-Bru, Rubicon and Funkin.
AG Barr is also deftly handling succession planning. When well-respected chief executive Roger White steps down at the end of this month, his replacement will be Euan Sutherland, previously a non-executive director at another soft drinks leader, Britvic.
A forward price-to-earnings ratio of around 15 for the fiscal year to January 2025, coupled with a forward yield of more than 3pc, looks like decent value.
Questor says: hold
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