No Pain No Gain: It's not a sexy company - but the profits might be
Saturday 22 April 2006
I have added Hargreaves Services to the No Pain, No Gain portfolio. It is probably the most unglamorous company I have ever recruited. Although involved in the sweat and toil segment of the business world, it could blossom into a future star of the Alternative Investment Market (AIM). Indeed, the shares have already made remarkable progress. Floated at 243p in November, they are as I write around 417p.
It was in February, when the shares had already made dramatic headway, that I became aware of the company and its attractions. If I waited I hoped they would surrender some of their exuberance. They have, however, steadfastly refused to give much away, displaying unwelcome resilience. So, despite the obvious dangers of what is after all a fancy price, I have decided to join the party, paying, I feel, rather dearly for the privilege.
So what makes Hargreaves special? Well, it overcomes its lack of sex appeal by offering basic services that should prosper in the next decade or so. It spreads over bulk haulage (moving coal and other aggregates around the country); waste handling, industrial services and importing and producing coke.
These activities made interim profits of £3m (up from £1.2m) and stockbroker Brewin Dolphin is looking for an annual pre-tax figure of £6.6m. The shares are therefore trading at 21 times expected earnings.
Buying shares around the halfway point between the interim and final profit announcements is often a sound policy. If there has been a lack of information - and that is usually the case - the shares tend to drift lower as investment interest wanes. However, my patience with Hargreaves achieved little reward.
My hope is that I have not missed the party. I take some comfort from portfolio constituent Goals Soccer Centres, running five-a-side football venues. A year ago I paid a then peak price of 125.5p. The shares are now 230p.
Hargreaves is, however, light years removed from GSC. It started with 20 vehicles 12 years ago. Today it has 370 of those articulated and rigid tipper trucks, lugging their loads around the country. There are also some canal barges. Besides coal - Hargreaves is a major importer, mainly from Russia - and aggregates, it carries huge amounts of waste from council tips to landfill sites and sorting stations.
Although coal may never recapture its glory days, it is staging something of a revival. The escalating price of oil is helping. And it is worth remembering that there are still nearly a score of coal-fired power stations in the country, getting through some 51 million tons a year. True, coal is a low-margin business. But Hargreaves, by importing through two ports it runs and then taking on the distribution, is able to wring reasonable returns from a big-volume business.
The group enjoys the bonus of covering itself against the soaring cost of oil as it has taken on long-term contracts which allow higher distribution costs to be passed on to customers. It is, in many ways, a support services business - an area which has impressed the stock market. Witness the strength of Mears and other facilities groups. Indeed, its waste disposal operation has guaranteed orders of more than £200m.
Last year Hargreaves bought the UK's only independent coke producer, Monckton, for up to £12m. It was just in the black when the deal was clinched. Already, prospects have been transformed, with the group making a major contribution to this year's profits. I expect further deals. And Hargreaves could itself attract predators.
Prezzo, the restaurant chain, is one portfolio constituent that has justified my faith. Last week it produced year's profits of £6.4m against £4.1m and dutifully increased its shareholders' dividend helping. The portfolio paid the equivalent of 17.25p for its shares; they are now 66p.
It is, of course, tempting to take profits. But I intend to hold on for the time being. I would never be surprised to witness corporate action. After all, the Kaye family, the force behind Prezzo, has a rewarding record of successfully building restaurant businesses and then selling at a top price.
However, I would not attempt to deter any investor who followed the portfolio into the shares from bailing out and locking in what is after all a handsome profit. Certainly there is a strong argument for selling, say, half a shareholding, thereby establishing a profit and enjoying a free ride on the back of the remaining shares.
Independent Partners; request a free guide on NISAs from Hargreaves Lansdown
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