No Pain, No Gain: Hargreaves Services gleams amid the gloom

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The Independent Online

Among the debris that represents the stock market these days, it is easy to overlook the few shares that continue to perform with the lustre that characterised what are now wistfully called the good old days – the first half of last year, actually.

Shares of Hargreaves Services, with coal mining to waste disposal interests, enjoy the enviable distinction of hovering, at least at the time of writing, not far from their all-time high at 630p, despite stripping out a 7p dividend. They would, I suspect, have turned in an even more majestic display, probably topping 700p, if doom and gloom had not enveloped the City.

Last month, the group rolled out figures that more than justified its exalted share performance. At the pre-tax level, profits surged 86 per cent to £17.9m. Excluding goodwill amortisation, the figure was £19m.

And progress should continue. The company's stockbroker, Brewin Dolphin, expects this year's profits, before amortisation, to hit £25m. So the shares are at less than 10 times projected earnings – hardly demanding for such a progressive company.

Hargreaves has a spread of activities that should, as far as possible, make it near recession-proof. Probably its most intriguing operation is coal mining.

It acquired Maltby, one of Britain's few remaining deep mines, from UK Coal 18 months ago. The Yorkshire mine helps feed the company's Monckton coke works. Most coal and coke is sold, often to power suppliers, under long-term contracts. So the surge in fuel prices is not fully reflected in the results. Even so, the production division, largely coal and coke, more than doubled profits. And Hargreaves happily points out that it is in a strong position when contracts are renewed in the next few years. It also expects to extend Maltby's life by 10 years to 2025 after a study showed that substantial reserves existed.

The acquisitive group, started 14 years ago with 20 lorries, today embraces such interests as building products, bulk haulage, mineral trading, port facilities, tyre shredding, warehouses and waste disposal. As chief executive Gordon Banham says: "If you want the lights to stay on and your bins emptied, this is what we do."

The No Pain, No Gain portfolio picked up the shares at 417p in February last year. They had arrived on AIM some 15 months earlier at 243p, capitalising the group at £57.5m. Today's valuation is about £165m.

Any triumphalism over Hargreaves has, however, to be tempered with the disappointing performances of some other portfolio constituents. Latest to let the side down is Pubs 'n' Bars, the 100-strong managed and tenanted pub chain. It rolled out one of those dismal trading warnings that are now an all too frequent aspect of City life.

Interim profits, nevertheless, are not too bad. A derivatives play has produced £323,000 and with takeover benefits flowing, the pre-tax figures are 7 per cent higher at £580,000. The dividend is missed, against 0.75p last year, and earnings per share are down.

As analyst James Hollins at stockbroker Daniel Stewart points out, "true" pre-tax profits are nearer an uninspiring £260,000. He has reduced his year's estimate from £910,000 to £510,000.

Mind you, it is no surprise that Pubs 'n' Bars has experienced a trading downturn. Pubs are deep in the doldrums, suffering from a host of unfavourable influences, ranging from duty increases and the smoking ban to rotten weather and cheap supermarket booze. With the shares of its much bigger rivals looking decidedly hung-over – Punch Taverns has dropped from more than 1,400p to not much more than 100p – such a tiddler did not stand much chance of resisting the general despair.

The portfolio descended on the shares at 23.5p. They had already fallen from 49p, and I assumed that any trading difficulties were already in the price. How wrong can you be? The shares are now 8.5p.

Last year, Pubs 'n' Bars produced pre-tax profits of a little over £1m, although underlying profits were actually down.

Chairman Seamus Murphy offers a little cheer. Good pubs are holding their value; it is mainly inferior, loss-making outlets that are flooding on to the market. And his London pubs "are showing a strong degree of resilience".

Daniel Stewart has cut its target price from 40p to 27p. It reckons the shares, at 8.5p, are a buy. So do I.

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