Back then, the small-cap’s share price was near 270p and after that, it rose to around 570p by August 2021. However, it then dropped back to lows near 380p in December 2021. And now, after shooting up this morning on the release of the half-year results report, the stock price is about 480p as I write.

An improving business

There’s some risk for investors in the move higher today because the valuation won’t be as keen as it was. But the main thrust of my old article was I couldn’t understand why the valuation was so low given the robust-looking prospects of the business. Hargreaves had been trading well and forecasts for improved cash flow, profits, debt-reduction and revenue growth were all bullish.

It seems the stock market began to form a similar opinion as it re-rated the stock higher. But today, my view is similar to last year’s given the ongoing news flowing from the company. I still think the valuation looks too low. And the market isn’t fully recognising the growth story emerging from the carcass of the company’s old set-up and its historical business.

Hargreaves describes itself as a diversified group delivering key projects and services to the industrial and property sectors. And today’s report contains some impressive figures. Earnings per share rose by 812% compared to the year-ago number. Net debt plunged by 85% to £3m. And the net cash figure ballooned to £8.5m after the company posted a net debt position of £8m last year.

Something is clearly going right for the business. And the directors kept positive momentum going for shareholders by increasing the interim dividend by almost 4% to 2.8p per share. However, ordinary dividends aren’t the only source of shareholder income from this company. The directors intend to continue to pay additional dividends relating to income from the firm’s German joint venture, Hargreaves Raw Materials Services (HRMS).

Diversified operations

HRMS supplies specialist raw materials to European customers in several industries. And profit after tax from that business rose to £9m from just £0.9m last year. It was to HRMS that Hargreaves previously sold its coal assets. And that’s why revenue to Hargreaves decreased by just over 17% “as expected” after exiting direct involvement in the coal business in December 2020.

Elsewhere, profits also increased. The Services division is building a “sustainable profit stream” with stable term contracts and framework agreements in the energy, environmental, infrastructure and industrial sectors. And the Land division focuses on maximising the value of its existing portfolio as well as developing a strong pipeline of new opportunities. Part of that is a renewable energy land portfolio.

The directors’ expectations “increased materially” for the current and future years. And with the share price near 480p, the price-to-asset value is just over one and the forward-looking dividend yield is above 4%. There are no guarantees for shareholders. And the value proposition isn’t as compelling as a year ago. But I think the potential in the business could lead to further gains in dividends and the stock price in the years ahead.

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They also expect generous double-digit percentage increases in earnings for those two periods. Meanwhile, in today’s half-year results report, the company revealed the disposal of its remaining coal assets for £24m. The post-period-end deal allowed the company to “eliminate bank borrowing”.

A fair valuation and a high dividend yield

I like the strong balance sheet and the decent growth prospects. I think the diversified operations remaining look well placed to thrive in a world building back from the coronavirus pandemic. Meanwhile, the valuation looks undemanding.

With the share price near 270p, the forward-looking earnings multiple is around 10 for the trading year to May 2022 and the anticipated dividend yield is about 7.5%. The price-to-tangible-asset value is running near 0.7% and that could be a decent metric to follow because Hargreaves Services owns land.

The company “controls” more than 13,000 acres of land across the UK and plans to realise “significant” value from the portfolio. One thing the firm does is to develop brownfield and derelict areas.

But that’s not the only arm to the overall business. There’s a distribution and services division engaged in processing and distributing bulk materials such as solid fuels, wastes and minerals. And there’s a specialist earthworks division working on large-scale infrastructure projects in the UK.

On top of that, the industrial services division provides materials handling, operation and maintenance. And electrical and mechanical engineering for the industrial sectors in the UK and Hong Kong.

A cash-producing associate

Hargreaves Services also has a stake in an associate German company called Hargreaves Raw Materials Services (HRMS). That company is a “key” supplier of specialist raw materials to “major” European customers in the steel, foundry, smelting, non-ferroalloy, sugar, limestone, insulation, refractory and ceramic industries. And it was the HRMS joint venture that bought Hargreaves Services coal business.

The directors explained in the report that the sale of the speciality coal stocks to HRMS “accelerated” the realisation of the £24m of cash from the coal inventory. But the deal also helps the growth of HRMS by “opening it up” to new markets in the UK.

And HRMS contributes to the dividend returns on offer here. In today’s report, the company declared its intention to pay a 12p dividend from the German JV. That compares with the 2.7p interim dividend and there will also likely be a final payment for the year later.

Today’s figures show reduced revenue and earnings and the company puts that down to the “impact” of delays to the HS2 rail project. But there’s a “strong” pipeline of contracted works, a “good” bank of land opportunities and an “increasingly valuable” investment in HRMS.

Of course, further contract delays are possible and the pandemic could yet throw more challenges at the company’s operations. If projected earnings fall short of expectations, the valuation may end up being less attractive and the share price could fall from where it is now. Nevertheless, the stock tempts me.

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I reckon diversified industrial and property services provider Hargreaves Services (LSE: HSP) is a good example. City analysts following the company expect impressive increases in earnings and shareholder dividend payments over the next couple of years, and potentially beyond that. If things work out well, the share price could rise too.

Recovery and growth

With the shares at 311p, the forward-looking dividend yield for the trading year to May 2021 is running above 6% and the earnings multiple is just over 15. And I think the valuation anticipates further recovery from what chairman Roger McDowell describes in today’s half-year report as “challenges” faced by the firm in the year to May 2019.

The half-time figures reveal to us that underlying earnings per share rose by 18.5% compared to the equivalent period the year before. But the company has been busy with acquisitions and disposals, which puts the business in a state of flux. However, that situation is a big part of the attraction because the potential for growth is building, in my view. For now though, the directors held the interim dividend flat.

Net debt increased in the period by just over 21% to almost £35m, not including lease liabilities, because of increased inventory levels, which strikes me as being a manageable level for the firm. Meanwhile, its activities in its Distribution and Services division delivered 77% of overall profit before tax in the period. Some 13% came from the company’s German associate HRMS, 8% from unallocated and legacy businesses, and just 2% from Land.

Big potential

But the directors see big potential in the land assets. After “a series” of strategic acquisitions, the land portfolio in the UK  amounts to around 15,000 acres. The directors plan to add value to the land by developing it. My guess is that the division could deliver a bigger share of company profits later.

McDowell explained in the report that the directors are focusing on delivering “reliable and growing” profits from the distribution and servicing businesses owned by the company. They also want to “unlock” capital from the division, which should allow “strong cash returns to shareholders” alongside investment in the growth of Hargreaves Land.

Meanwhile, McDowell said the German associate has “the full support” of the Hargreaves directors as it develops from a pure trading business into supplying and recycling specialist raw materials for the German manufacturing sector. 

I like the look of this firm and can see decent potential for an investment in the shares. I’m tempted.

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As such, there could be a recovery opportunity on offer for long-term investors. The stock now appears to be cheap, has improving financial prospects and offers a high income return. Of course, it’s not the only share with a disappointing recent performance. Could a smaller stock which released results on Wednesday also offer recovery potential?

Improving prospects?

The stock in question is Hargreaves Services (LSE: HSP). The diversified business which delivers services to the industrial and property sectors reported that trading for the first half of its financial year has been satisfactory. It expects revenue and underlying operating profit to show growth versus the same period of the previous year, with it experiencing improved trading within its UK businesses. It remains on track to meet guidance for the full year.

The company’s net debt declined to £28.6m from £30.8m in May 2018. Further sales of legacy assets are due in the second half of the year.

In the last six months, the Hargreaves Services share price has declined by around 10%. This means that it now trades on a price-to-earnings (P/E) ratio of around 14. While there could be recovery potential ahead as a result of its improving financial outlook, the stock appears to be relatively risky and lacks a wide margin of safety compared to other mid and small-cap opportunities. As such, it may lack relative appeal at the present time.

Return potential

In contrast, the Aviva share price appears to be exceptionally cheap following its recent share price fall. It trades on a P/E ratio of 6.9 using the company’s current year earnings forecast. And with net profit due to rise by 9% next year, it seems to be delivering on its strategy. It is, of course, building for the long term, with significant acquisition activity planned at the same time as it is aiming to use excess capital to reduce overall leverage.

From an income perspective, Aviva may be one of the best opportunities in the FTSE 100 at the present time. The stock has a yield of 7.3%, and is due to raise dividends by 12% in 2019. Further growth could be ahead due to its increasingly generous stance on dividend payments as a proportion of net profit, while a rising bottom line could act as a catalyst over the medium term.

Although there are a number of FTSE 100 stocks which could offer long-term investment appeal at the present time, Aviva’s mix of growth and income potential could make it a strong performer in the coming years. After a tough period, it appears to have significant recovery potential in my opinion.

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However, on some occasions, a company’s share price may have fallen for a good reason. 88 Energy (LSE: 88E) may be one such example, with the stock’s market valuation having declined by 64% in less than four months. The company has endured a disappointing period, with its outlook relatively uncertain.

Challenging prospects

As with any oil and gas exploration company, 88 Energy has required significant sums of investment in order to make progress with its strategy. It recently launched a rights issue as it seeks to boost its financial resources ahead of further exploration activities. One of the problems facing the company, though, is the challenge of turning its potential into revenue and profitability. Flow tests have generally been disappointing, with the accessibility of potential reserves a key issue for the business.

Investors, it seems, are becoming increasingly uncertain about the company’s prospects. Alongside the recent downturn in the wider resources industry, this could mean that the 88 Energy share price remains weak in the near term. Investors seem to be increasingly ‘risk-off’, which could push them towards larger, more diversified and financially-stable businesses in the FTSE 350.

Clearly, the stock has the potential to recover. But given the challenges it has faced, it may only prove to be of interest to less risk-averse investors. Even though its rewards could be high, the near-term risks facing the business continue to be significant.

Improving outlook

As mentioned, some share price falls can create more appealing investment opportunities. One company that could offer an improving share price outlook is Hargreaves Services (LSE: HSP). The diversified company, which provides services to the industrial and property sectors, released a trading update on Tuesday to coincide with its AGM.

The business is on track to deliver on its revised expectations. It has completed the sale of Brockwell Energy, with the net funds of £15m from the deal having been applied to reduce short-term overdraft borrowings. In the current year, it’s forecast to post an improvement in earnings, with a price-to-earnings (P/E) ratio of 13.5 suggesting that it could offer good value for money.

Clearly, the fall in Hargreaves Services’ share price of around 8% in the last year is relatively disappointing. The company has experienced a turbulent period, with one of its customers, Wolf Minerals, having ceased trading. The company, though, appears to be performing relatively well and has the potential to deliver a stronger financial performance in future.

While potentially risky and volatile, the stock could offer a margin of safety. Therefore, for less risk-averse investors who are seeking a possible turnaround stock, it may be of interest over an extended time period.

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Looking ahead though, there could be scope for a successful recovery. As a result, now could be a good time to buy the stock alongside another potential turnaround play.

Challenging trading conditions

The last five years have been exceptionally difficult for UK retail shares. Consumer confidence has come under intense pressure at times, with it generally being negative during the period. The industry has also seen a continued switch away from traditional forms of retailing, with consumers preferring to shop online and in convenience stores. Companies that have been unable to innovate and adapt their business models have generally performed poorly versus their nimbler peers.

Morrisons has also been negatively impacted by increasing competition within the retail sector. The growth of budget retailers such as Aldi and Lidl has caused shoppers to leave major supermarkets, with their increasingly price-conscious outlook at least partly caused by inflation being above wage growth. And with Brexit causing the prospects for the UK economy to worsen, stocks operating mostly in the UK have been hit hard.

Turnaround potential

Now though, Morrisons seems to be on the road to recovery. It’s being helped to some degree by a fall in inflation in recent months, with consumer disposable incomes being under less pressure than they were last year, in real terms. However, it’s also put in place what seems to be a solid strategy that focuses on ramping-up its growth prospects, while improving its balance sheet strength.

For example, the company has expanded online through a deal with Amazon, while an agreement with McColl’s means that the company now has its products in a wide range of convenience stores. Such agreements do not eat up large amounts of capital and yet provide the company with access to growth areas which are much stronger than the traditional supermarket space.

With its bottom line due to rise by 8-9% per annum over the next two years, its shares could generate stronger performance than the FTSE 100 over the medium term.

Improving outlook

Also offering turnaround potential after a difficult period is industrial, energy and property services company Hargreaves Services (LSE: HSP). It reported an encouraging pre-close trading update on Friday which showed its performance during the year has been satisfactory. It expects to report results that are in line with expectations and has made further progress with its disposal programme.

Looking ahead, Hargreaves Services is forecast to post a rise in earnings of 40% in the 2019 financial year. This puts its shares on a price-to-earnings growth (PEG) ratio of 0.4, which suggests they could offer good value for money.

Clearly, Hargreaves Services has endured a challenging period in its recent past. However, with it seeking to restructure its operations and improve its financial standing, it could be worth a closer look for less risk averse investors. A dividend yield of 2.6% is anticipated this year by the market, with an improving income outlook having the potential to boost investor sentiment in the stock – especially since dividends are due to be covered 2.5 times by profit this year.

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A turnaround opportunity

Property and energy group Hargreaves Services (LSE: HSP) is midway through a transformation that should see it move out of the coal industry and become a property and renewable energy group.

Although the gradual decline of the group’s coal mining and distribution business has been painful, it’s become apparent that the company owns a lot of valuable land, equipment and coal stockpiles.

Many of these assets have now been sold, while the land is being channelled into alternative energy, industrial and residential developments. Management expects to generate £35m of value from land assets by 2021 — a significant amount for a £115m firm.

Alongside this, the group has continuing operations in the transport and construction sectors, as well as a specialist coal trading operation in Germany, where the industrial market for coal is much stronger.

Available at a 20% discount

Hargreaves published its interim results today. Revenue fell by 12% to £150.3m due to lower levels of asset sales, but underlying operating profit rose by nearly 10% to £2.3m. The group’s underlying earnings per share rose from 0.3p to 2.7p, supporting guidance for full-year earnings of 5.4p per share.

A fall in debt helped to lift the group’s net asset value from 406p to 423p per share. Based on the current share price of 350p, this suggests the group’s shares could climb by at least 20% as value is gradually realised from its assets.

Having followed this stock for several years, I’m comfortable with the company’s projected figures. The group’s guidance to date has been very accurate. Another attraction is that chief executive Gordon Banham owns an 8% stake in the company, so his interests should be closely aligned with those of shareholders.

Trading on a 2018/19 forecast P/E of 15 and with a 2% yield, I continue to rate this stock as a value buy.

This could sail away

Shipping services group Braemar Shipping Services (LSE: BMS) has faced difficult conditions over the last few years. Downturns in both the oil and shipping sectors caused demand for its broking and technical services to slump.

However, both oil and shipping appear to be turning a corner. Braemar has also cut costs and made several acquisitions which will increase the range of financial services it can offer.

Trading has been stable and full-year profits are expected to rise modestly this year. Brokers covering the stock have turned increasingly positive — forecasts for 2018 earnings have risen from 19.6p per share in February 2017, to 21.4p per share today.

This increase hasn’t yet been matched by the share price, which is currently slightly lower than it was a year ago. In my view, this could be a buying opportunity.

Like Hargreaves Services, Braemar has a strong balance sheet with very little debt. I can see no danger of financial distress, and the company’s cash flow has allowed it to continue paying a dividend, albeit reduced.

These shares currently trade on a forecast P/E of 11.5 with a prospective yield of 5.9%. I rate the stock as a buy, and may add more to my personal holding.

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Today I’m going to look at two turnaround stocks from my own portfolio. Both have recently published results. One has already performed very well, while the other has disappointed so far.

This asset play has come good

Hargreaves Services (LSE: HSP) has its roots in the coal business. The group used to mine, trade and transport coal for big UK coal consumers like power stations and steelworks. Unfortunately, most of the group’s one-time customers have closed down, or will do soon.

Over the last couple of years, Hargreaves has gone through a complex and painful restructuring to exit the UK coal business. I’ve built a holding through this period because I thought the stock’s valuation didn’t reflect the underlying value of the group’s property portfolio and other surplus assets.

Chief executive Gordon Banham — who has a 7.77% shareholding — has diversified the business and started to realise value from these assets. Today’s full-year results give a good idea of progress so far, and the potential for further gains.

Underlying pre-tax profit from continuing business rose from £3m to £7.7m last year. Underlying earnings rose from 5.6p to 17.9p per share, while the total dividend was increased from 2.3p to 7.2p per share. Net debt remains modest, at £15.7m.

These results put Hargreaves’ stock on a trailing P/E of 20 with a dividend yield of 1.9%. Clearly that isn’t cheap. So why invest?

This is the opportunity

Hargreaves recently secured planning permission for a large housing development near Edinburgh. It also has a number of other sites with development potential.

According to today’s results, the firm’s property portfolio has a current market value of £49.4m. When combined with the group’s other assets, this gives a net asset value per share of 491p. That’s 29% more than the current share price of 380p.

I plan to continue holding but will keep the position under review. I think Hargreaves’ long-term growth prospects are limited. Much of its value lies in liquidating its surplus assets. So the stock may continue to trade at a discount. I may decide to sell later this year to reinvest the cash in stocks with more growth potential.

I’m still confident

One stock which investors can buy at a big discount to its book value is Barclays (LSE: BARC). This bank has performed poorly this year, losing 6% of its market value while most rivals have made gains. At today’s price of 210p, the shares trade at a 26% discount to their tangible net asset value of 284p.

There’s no doubt that Barclays’ turnaround has taken longer than expected. But I think it has also suffered from poor market sentiment and the underlying performance of the bank is improving. I think the stock remains attractive as a value investment.

The group’s recent half-year results were clouded by some exceptional costs relating to the partial sale of its African business. But excluding these, adjusted earnings rose by 18% to 7.1p per share during the first half of the year.

The bank now trades on a forecast P/E of 11.4 for 2017, falling to 9.5 in 2018. In my view, continued progress should lead to decent gains for shareholders from current levels. I continue to hold.

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Encouraging progress

The company in question is Hargreaves Services (LSE: HSP). The diversified property, energy and infrastructure specialist has released encouraging half-year results. They show progress being made towards its three strategic goals.

For example, earnings within the continuing Distribution & Services operations business are set to be within the target range previously set. Furthermore, the company is making progress in creating and delivering the targeted £35m-£50m uplift in value from the Property & Energy portfolio. And with cash realisation from legacy assets also continuing, it appears as though the business is in the process of recording improved financial performance.

Growth potential

Of course, Hargreaves Services remains a relatively risky stock to own. Its profitability has slumped to near-zero in the period, which shows just how large its turnaround project will be. Making it more difficult is the diversified nature of the business. This means there are many risks facing the business, while restructuring and reorganising is likely to take longer and be more complicated than for a pureplay operation.

However, Hargreaves Services is expected to deliver a stunning turnaround. In the current year, its earnings are forecast to double and then rise by a further 43% next year. Despite this rapid rate of growth, its shares trade on a price-to-book (P/B) ratio of just 0.67. This indicates they could rise by 50% and still only trade at NAV, which would be a realistic valuation given the company’s uncertain outlook.

Sector peer

Of course, Hargreaves Services is not the only company in its sector to experience difficult trading conditions. Builders merchant Travis Perkins (LSE: TPK) is expected to report a 1% fall in earnings in 2017, as uncertainty surrounding the outlook for the UK economy starts to impact on its performance.

While this may be the case in 2017, the company’s bottom line is forecast to return to growth of 9% next year. This puts it on a price-to-earnings growth (PEG) ratio of only 1.3, which indicates that it offers a relatively wide margin of safety.

Clearly, Brexit talks could prove to be negative for the economy and cause investor sentiment to come under pressure. In such a situation, Hargreaves Services and Travis Perkins could see their share prices fall. However, the extent of this may be limited due to their low valuations. For long-term investors, now could be the right time to buy both stocks, with Hargreaves Services seeming to have the more enticing risk/reward ratio.

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As such, a wide margin of safety may be required when investing in Hargreaves Services. Its shares currently have a price-to-earnings growth (PEG) ratio of only 0.3, therefore they appear to offer growth at a very reasonable price. While they may remain volatile as the effects of Brexit become apparent, for long-term investors Hargreaves Services appears to be a bargain.

Share price slump

Also reporting today was Clarkson (LSE: CKN). The integrated shipping services provider’s shares have slumped by 17% as it experienced a difficult trading period since its AGM. The ClarkSea index has fallen by a further 10% since the AGM, so that its average level for the first six months of 2016 was 30% lower than for the first half of 2015.

This deterioration in freight rates is due to higher uncertainty regarding the global economic outlook as well as the continuing imbalance between supply and demand in shipping and offshore. Clearly, Clarkson’s outlook is somewhat downbeat and this is reflected in its expected rise in earnings of just 2% this year. However, due to significantly better performance expected for next year, Clarkson has a PEG ratio of 0.7 and this indicates that for less risk-averse investors it could be a sound long-term buy.

Earnings rise

RM’s (LSE: RM) update has boosted its share price by over 4% today. The education software and services company recorded an increase in adjusted earnings of 5.2% in its first half, with strong revenue growth in its Results division partially offsetting reductions in its Resources and Education segments. As such, results were in line with expectations even though the UK education market remains somewhat subdued.

This operating environment is reflected in RM’s forecasts. It’s expected to report a fall in earnings of 5% this year, followed by a rise of just 2% next year. While disappointing, RM’s price-to-earnings (P/E) ratio of 7.6 indicates that it has a sufficiently wide margin of safety to merit purchase right now. Certainly, share price volatility may be high, but profitability for RM’s investors may be impressive in the coming years.

Strong pipeline

Meanwhile, Kier Group (LSE: KIE) also reported today. The property and construction services group is trading in line with management’s expectations since the release of its interim results in March. Looking ahead, it faces an uncertain outlook due in part to the potential impact from Brexit on UK construction. However, Kier believes the breadth of its business activities and strong order book provide both visibility and resilience.

For example, Kier Group’s Property division has a pipeline of projects totalling over £1bn, while its Residential division’s mixed tenure business has a pipeline of over £600m. Due to Kier trading on a forward P/E ratio of only 8.8, it seems to have a sufficiently wide margin of safety to make it an appealing long-term buy. Furthermore, its yield of 6.2% is likely to have huge appeal if interest rates fall over the coming months.

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