Hargreaves Services (LSE: HSP), a supplier of solid fuel and bulk material logistics is falling today, after the company issued its preliminary results for the year ended 31 May 2014.
The company reported a 20.9% rise in annual pre-tax profit. Pre-tax profit for the period rose to £52m from the previously reported £43m. Underlying pre-tax profit, which excludes certain items, came in at £55.1m, an increase of 5.6% year on year. This double-digit profit growth was reported despite a miniscule 3.1% increase in sales for the period.
Additionally, the company reported diluted earnings per share growth of 10.1% year on year and management announced a 24.4% increase in the dividend, to 25.5p per share.
Nevertheless, despite these impressive results, Hargreaves’ management warned that the group sees challenges ahead, particularly the uncertain economic climate and falling demand for coal.
Commenting on the results, Chairman Tim Ross said:
“This year was challenging for Hargreaves. In difficult market conditions it is testament to the strength of the Group that we are able to announce a 6% increase in profits. The Group achieved strong profitability on all measures. The review of strategy that the Board has commenced will ensure the Group is positioned to minimise risk and optimise shareholder value in response to rapidly evolving markets. The disposal of Imperial Tankers for £26.9m, completed earlier this month, is an encouraging first step.”
Transition 
Hargreaves is the UK’s leading coal production, trading and distribution company, which used to be a lucrative trade. However, the company is being forced to adapt to world’s low carbon economy. Sliding coal prices and a lack of demand have also weighed on the company.
As part of this strategy Hargreaves is selling off non-core assets to pay down debt and return cash to investors. Net debt fell just under 12% during the year ended 31 May, and the sale of Imperial Tankers, as mentioned above, should only speed up debt reduction.
What’s more, the group is expanding into the services business. Specifically, Hargreaves provides operation and maintenance services for materials handling plant at power stations, port facilities and steelworks. The group has won several contracts over the past year around the world including within China.
Undervalued
So, Hargreaves is selling non-core assets, is expanding into the services industry and remains a leader in the UK coal market. Unfortunately, due to the company’s exposure to the UK coal market, investors are unwilling to pay a premium for Hargreaves’ shares.
At present levels, despite a 20% jump in pre-tax profit, Hargreaves is trading at a forward P/E of 6.7, making it one of the cheapest companies around. Further, after factoring in today’s dividend hike of 24.4%, Hargreaves’ shares support a yield of just under 3.9%. The payout is covered around five times by earnings per share, leaving plenty of room for growth.
