Hargreaves Services is growing at a filthy rate due to Britain's muddled thinking on energy.
Hargreaves Services (LSE: HSP) is up 45% in barely a month, with its rise capped off this week by the release of truly exceptional results to 31 May.
The latest numbers build on an excellent record since the company arrived on AIM in 2005.
Yet despite the recent rally, it's arguable the stock market still hasn't fully recognised -- or believed -- this company's performance.
Rare indeed is a business that grows underlying profits at a compound rate of 64% and earnings per share at a compound rate of 52% over four years.
Even lesser-spotted is such a business trading on a historic P/E rating of 9 like Hargreaves Services.
Black gold
Hargreaves Services' shares were languishing around 400p earlier in the year as investors fretted that the party was over, but Tuesday's results seemed a pretty defiant reply of "not yet!"
Pre-tax profits soared 46% to £26.2 million, after revenues breached the half-a-billion barrier with a rise of 23% to £503 million on the back of a booming coal business.
Diluted earnings per share rose 47% to 67.3p, and the full-year dividend grew 14.6% to 11.8p, for a meagre but well-covered yield of 1.7% at today's 700p.
Hargreaves' chairman, Tim Ross, could scarcely sound more confident:
"All the divisions are well placed to continue to drive further profit growth both organically and by complementary acquisitions. The Board continues to view the current year with significant confidence and expects the Group to build on its impressive track record."
The chief executive Graham Banham is equally ebullient. Having sorted a £115 million credit line, he is looking to expand Hargreaves' European operations as well as continuing with an ongoing upgrade programme.
The company already carries not insignificant debt of £69.2 million, up from £46.2 million last year. I don't like it, but the interest charge of £4.9 million is probably manageable given the strong cashflow.
Fossil fuels are us
Hargreaves' success seems to me a pretty damning reflection of UK Government energy policy -- or rather the lack of it.
While ministers have talked about green energy and security of supply without doing much, have mooted going nuclear and have tinkered with subsidies for domestic wind turbines and solar panels, Hargreaves has helped ensure the our lights don't go out by importing piles of coal -- more than two million tonnes in the last year alone.
As well as the imports, Hargreaves produces its own coal and coke from facilities in Maltby, which it sells to the stock market listed Drax (LSE: DRX). Other divisions such as transportation and industrial services add a chunk to revenues but relatively little to profits.
This is clearly not a share for the greens amongst us; the company is even looking to restart open-cast mining at South Wales' Tower Colliery.
Admittedly it also has an option to lease six sites in Yorkshire for renewable energy production, but that and the puny £400,000 its RocFuel renewables trading joint venture brings in won't fool anyone -- Al Gore won't be adding Hargreaves Services to his portfolio anytime soon.
What of the future?
It does seem bizarre that a company importing coal into a country still littered with the stuff is able to trouser the profits Hargreaves does -- and grow them at such a rate -- but the results speak for themselves:
| Year | Revenues | Pre-tax profit | Earnings per share | EPS growth | Dividend |
|---|
| 2006 | £147m | £5.5m | 20.3p | 116% | 5.0p |
| 2007 | £240m | £9.6m | 29.0p | 43% | 9.0p |
| 2008 | £405m | £17.9m | 52.2p | 80% | 10.3p |
| 2009 | £503m | £26.2m | 77.7p | 49% | 11.8p |
Source: Digital Look
Analysts are confident growth can continue -- earnings per share estimates have been raised by 5p for 2010 and 2011 in the past month alone -- albeit at a slower rate compared to previous years.
Consensus expectations -- including the latest updates issued yesterday -- come in at:
| Year | Pre-tax profit | Earnings per share | Dividend |
|---|
| 2010 | £33.4m | 89p | 13.0p |
| 2011 | £35.8m | 95p | 14.3p |
Source: Hemscott
Still, a 15% growth rate is enough to keep Hargreaves Services looking like a potential Jim Slater-esque share with a PEG ratio of around 0.6.
At your service?
Hargreaves Services certainly looks a smoothly-oiled (or rather coal-fuelled) operation, but it will surely attract more competition -- this is not a sophisticated business model, after all.
Any squeeze on margins isn't likely to come from the Government, however, whose empty coffers mean the private sector will be tasked with solving the energy crisis. And there's no reason why coal -- and Hargreaves Services -- shouldn't continue to be part of that.
Future acquisitions will be inevitably risky, but Hargreaves' has a track record and it is broadly sticking to what it knows. And according to management, fluctuating commodity prices aren't a problem -- something the company's steady growth in the face of the wild gyrations over the past few years attests to.
Admittedly, it's a bit hard to believe that the 50% compound growth of recent years hasn't emerged from an unusual set of circumstances.
But the forward P/E of under 8 allows for some hiccups, and short of nuclear fusion being invented by Christmas, I don't see any let up in our demand for fossil fuels.
As a citizen of a warming world I'd rather the outlook for Hargreaves Services was rather poorer. But for most investors it certainly looks worthy of consideration.
More share ideas from Owain Bennallack:
