Derek Pain: Hargreaves continues to fire on all fronts

No Pain, No Gain
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The Independent Online

Hargreaves Services, the current star of the No Pain, No Gain portfolio, seems to be thriving despite the hand-wringing gloom that has enveloped large chunks of our industrial landscape.

Chief executive Gordon Banham has completed what should be an earnings-enhancing deal and revealed that trading is running ahead of expectations. So City forecasts suggesting profits will hit £25m this year could be inaccurate. Just how well the coal-to-waste-disposal group is performing should become evident in a couple of weeks when interim figures appear.

The latest deal should help fuel profits progress. Hargreaves has borrowed £9m to buy the 50 per cent of Coal4Energy it did not already own. It set up the company, now the country's largest domestic and industrial coal supplier, with UK Coal nearly three years ago. In its last full year, Coal4Energy produced profits of £1.9m before tax and management charges. The deal should, Banham believes, have a "significant" impact on group second-half profits.

The idea is that Coal4Energy, which controls smokeless briquette maker Maxibrite, will continue to sell more than 250,000 tons a year from UK Coal, as well as Hargreaves' own production.

The portfolio descended on Hargreaves shares two years ago at 417p. They are now around 520p after topping 640p in the boom days.

Although the shares continue to perform quite well, my one other portfolio winner at the turn-of-the-year calculation has failed lamentably to hold its modest gain. blotted its copybook with a profits warning. The shares have fallen to 27p against the portfolio's 30.5p buying price.

Sales appear to be running some 3 per cent lower and the company has undertaken to pay for some of the promotional campaigns that franchisees would usually finance. Consequently, margins are under pressure. Year's profits are expected to be "slightly below" the £2.4m achieved last year. The tougher climate has encouraged researcher Hardman & Co to reduce its forecast. Against an earlier estimate of £2.3m, analyst Sonia Kaur is now looking for just over £2m in the year ending March, with a modest improvement pencilled in for next year.

Clearly, some of the small and medium-sized businesses that accommodates, through its 300 or so (mostly franchised) outlets, are feeling the recessionary pinch.

But Kaur expects dividends to increase. At its last balance-sheet date, had more than £3.5m tucked away. Remarkably in these low-interest-rate days, its shares offer a yield exceeding 10 per cent.

Still, the profit warning was not entirely devoid of encouraging developments. A presence in the US has at last been achieved, with a master franchise granted to a commercial printer in Florida. Two outlets are due to open soon and although is probably only covering its US costs at the moment, the potential is obviously considerable. However, many a British company has viewed the US as a happy stamping ground only to retire battered, bewildered and defeated. By adopting the franchise route, Printing. com should, I believe, have removed any danger of wounding losses.

The group has other, still rather modest, overseas interests. Clearly, if the domestic performance is repeated on foreign soil, the outlook would be transformed. But patience is needed – success will not appear overnight.

Pubs 'n' Bars, the little pub chain, has also rolled out a cautious statement. Its shares bump along at a sobering 3p against the 23.5p the portfolio splashed out. In the last quarter of last year, turnover fell 2.3 per cent, although Christmas trading was more cheerful. Pubs 'n' Bars is heavily borrowed, and with the booze business under intense pressure, the shares are friendless. The portfolio intends to hang on, although it could be argued I should have called time some months ago.

For the year, profits, before any special influences, could be around £500,000. At the interim stage, the dividend lapsed as the 100-strong chain strove to retain cash as the trading environment deteriorated. Pubs 'n' Bars' sinking share price – with a capitalisation of a mere £950,000 – mirrors the performance of much bigger peers, such as Punch Taverns.

Yet chairman Seamus Murphy has a defiant message. He says the group's "convivial, traditional, non-fashion-dependent pubs will prove to be a resilient business with good growth prospects over the longer term".

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