Hargreaves Services has a track record many companies (and investors) would envy.
Hargreaves Services' (LSE: HSP) impressive success at mining, importing, transporting and selling coal makes you wonder why no one else is doing it.
Since its flotation in 2005, it has delivered continuous increases in operating profit and dividends and it is now one of the AIM's 50 largest companies.
Clean results from dirty fuel
Hargreaves' latest interim results show revenues rose by £68.9m to £322.8m over the six months to 30 November 2011, compared to the same period in 2010.
However, operating profits for the six-month period fell from £20.9m to £18.9m and operating margins decreased from 8.2% to 5.9%, due to rising commodity prices and temporary lower yields at one of Hargreaves' mines.
Net debt also increased from £66m at 31 May 2011 to £101.4m at 30 November 2011, but Hargreaves says this reflects seasonal demand for working capital, something I confirmed in last year's interim report.
Overall gearing fell from 101% at the end of November 2010 to 84% at the end of November 2011.
Mine's a colliery
In December 2011, Hargreaves was given planning permission to reopen Tower Colliery in Wales as a surface mine. It expects coal production to begin by the end of 2012 and already has a contract in place to sell the coal to a Welsh power station.
Hargreaves says that it will now accelerate its efforts to develop a number of other surface mining opportunities to supplement output from its two deep coal mines, which alone produce two million tonnes of coal a year.
In addition to its own coal, Hargreaves imports substantial amounts of coal from abroad to meet customer demand. The results speak for themselves:
| Year ending | Revenues | Pre-tax profit | EPS | EPS growth | Dividend |
|---|
| May 2007 | £240.1m | £9.62m | 28.98p | 43% | 9.00p |
| May 2008 | £404.9m | £17.86m | 52.17p | 80% | 10.30p |
| May 2009 | £503.09m | £26.17m | 77.70p | 49% | 11.80p |
| May 2010 | £459.78m | £30.72m | 91.00p | 17% | 13.50p |
| May 2011 | £552.26m | £36.93m | 105.00p | 15% | 15.50p |
Source: Digital Look
Will it go up in smoke?
Given the political rhetoric over climate change and the need to develop cleaner sources of energy, you might doubt the long-term prospects of a company whose profits depend on coal.
Coal power stations will eventually decline, but Hargreaves is gradually diversifying so that it will no longer be dependent on this market. As well as expanding into Europe and Asia, it is making strong inroads into supplying coal products to the steel industry.
Hargreaves is a growth play rather than an income share, with a forecast yield of just 1.5%. However, it trades on a sensible price-to-earnings of just over 10 and has an impressive record of increasing earnings, so certainly deserves a closer look.
Do you believe in Hargreaves' coal-backed story? Leave a comment below to let me know.
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