Derek Pain: Fuel transport group is rewarded for its faith in the long haul
No Pain, No Gain
Saturday 05 March 2011
Hargreaves Services is one of my more successful investments. Progress has not been sensational; indeed some shares have made far more headway. Even so, a surge from 417p to a 985p peak since I recruited the shares to the No Pain, No Gain portfolio four years ago is a highly acceptable performance. Last week the fuel-to-transport group emphasised its strength. Interim underlying operating profits emerged 13.3 per cent higher at £20.9m with the pre-tax figure at £16.1m, a gain of 9.6 per cent. And there seems little doubt that the group will hit City forecasts of around £40m for the full year. The interim dividend, at 5.1p a share, is hoisted 15.9 per cent. No surprise then when the group says it "is expecting a strong second- half performance".
It has probably not benefited quite as much as some expected from the upsurge in coal and coke prices. The main reason is its policy of long-term fixed- price deals. But these contracts expire in the next 30 months and when renewed will reflect current prices, adding a possible £10m to group profits.
Hargreaves arrived on the stock market in November 2005. The shares were placed at 243p, capitalising the group – started 11 years earlier with 20 coal haulage lorries – at £57.5m. Current valuation is £264.1m. Since 1994 the group has spread far and wide. It now has interests in Europe, a big influence in the interim profit advance, and is building a presence in Asia. The 20-strong fleet has grown into a leading UK transport operation and its energy and commodities division – the largest profit contributor – provides a range of fuels, traditional and renewable.
Coal is mined at Maltby in South Yorkshire, with its production going towards making coke that is subsequently shipped to countries such as Finland and South Africa. The Maltby mine has presented a few problems, although overall production profits increased in the half year. Hargreaves is nursing hopes of lifting coal output by nearly seven million tonnes over six years through a development awaiting planning approval in Wales. Despite the emotional dialogue of the more vocal environmentalists, it remains convinced coal has a rewarding long-term future.
The shares have progressed, particularly in the past nine months, but are still reasonably priced, at around 9.3 times anticipated earning. Stockbroker Panmure Gordon has again revised its target price. A few months ago it was shooting for 910p; then it moved to 1,011p before settling for 1,154p.
From one of the longest serving portfolio members to one of the shortest – Avation, a January recruit. The aircraft-leasing business, which moved from the fringe Plus market to full London listing last year, is now thinking of obtaining a share presence in Australia. Such a development would make sense as it has close links with a "Down Under" airline, Skywest. The group is planning a significant expansion of its squadron with up to 18 new aircraft scheduled to feature with Skywest and another Australian airline, Virgin Blue.
Avation needs to raise cash. It feels a dual presence on the London Stock Exchange and the Australian Securities Exchange (ASX) will help. It is also exploring other funding avenues, including assistance from aircraft manufacturers. Still, it is pretty clear Avation intends to tap shareholders. I hope it will not indulge in one of those private placings that exclude most investors on the share register. I would suggest a straightforward rights issue. If it does adopt the placing method it should ensure it is accompanied by an open offer allowing all to participate.
The shares, helped by the proposed expansion, have flown high since arriving among fully listed stocks – from 58p to just over 100p. They joined Plus five years ago at 4p, after Skywest, which is traded on AIM, allowed its leasing side to go its own way. Interim figures last month were encouraging, up 82 per cent, and researcher GE&CR forecasts year's profits of £5.58m against £3.55m and lifted its target price to 172p.
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