Hargreaves Services : Interim Results

RNS Number : 4634O Hargreaves Services PLC 30 January 2019

30 January 2019

HARGREAVES SERVICES PLC

(the "Group" or "Hargreaves")

Interim Results for the six months ended 30 November 2018

Hargreaves Services plc (AIM: HSP), a diversified group delivering key projects and services to the industrial and property sectors, announces its interim results for the six months ended 30 November 2018.

KEY FINANCIAL RESULTS

Unaudited	Unaudited
Six Months	Six Months ended
ended 30 Nov	30 Nov 2017
2018
£167.9m	£150.3m
Revenue
£4.1m	£3.1m
Underlying Operating Profit*	£(6.1)m	£(2.3)m
Operating Loss
5.4p	3.5p
Underlying EPS
(2.6)p	(4.0)p
EPS	2.7p	2.7p
Interim Dividend
£28.6m	£20.6m
Net Debt
£133.4m	£134.9m
Net Asset Value	415p	423p
Net Assets per Share

* Underlying Operating Profit is defined by the Board as Operating Profit from continuing operations prior to exceptional items and amortisation of intangible assets and includes the Group's share of the operating profit of its German associate.

HIGHLIGHTS

• ·Revenue growth of 12%, driven by UK businesses;

• ·Working capital increased due to growth in Distribution & Services business;

• ·Underlying Operating Profit increased by 32%;

• ·Improvement in Underlying Operating Profit margin to 2.4% (2017: 2.1%);

• ·Conditional sale contract signed for first plot at Blindwells;

• ·£8.1m exceptional loss relating to insolvency of Wolf Minerals (UK) Limited

• ·Interim dividend maintained at 2.7p (2017: 2.7p);

• ·Successful disposal of Brockwell Energy Limited.

Commenting on the interim results, Chairman Roger McDowell said:"Whilst it is pleasing to report growth in revenue and margins from the Distribution & Services business, which is proving to be a progressive source of Underlying Operating Profit, the Group suffered a substantial loss following the failure of its tungsten mining customer, Wolf Minerals. Despite this setback, the Board is confident that the Distribution & Services business will continue to provide the Group with near term growth and cash generation whilst the Property business becomes established to realise medium and longer term shareholder value."

For further details:

Hargreaves Services plc

0191 373 4485

Gordon Banham, Group Chief Executive

John Samuel, Group Finance Director

Buchanan (Financial PR)

0207 466 5000

Mark Court / Sophie Wills / Henry Wilson

N+1 Singer (NOMAD and Joint Corporate Broker)

020 7496 3000

Sandy Fraser / Rachel Hayes / Justin McKeegan

Investec (Joint Corporate Broker)

020 7597 5970

Sara Hale / Helene Comitis

CHAIRMAN'S STATEMENT

Introduction

I am pleased to report on the underlying progress of Hargreaves in the six months ended 30 November 2018. The Board has continued to realise legacy and non-core assets to reduce debt and to focus on core activities in Distribution & Services and Property to create sustainable platforms for growth. Brockwell Energy Limited, the Group's former energy business, was successfully disposed at a profit during the period, however, the Group also suffered a material loss following the failure of Wolf Minerals (UK) Limited.

Results

Revenue increased by 12% to £167.9m (2017: £150.3m). In Distribution & Services revenue grew by 4% to £152.5m (2017: £146.8m) despite a reduction of £1.5m in revenue deriving from the three legacy contracts in Specialist Earthworks. Property revenue increased to £9.4m (2017: £3.1m) due to the timing of surplus land sales. Sales of Legacy assets amounted to £5.9m (2017: £0.4m).

Underlying Operating Profit for the first half was 32% higher at £4.1m (2017: £3.1m). Distribution & Services recorded a 14% increase in Underlying Operating Profit to £6.4m (2017: £5.6m) and Property improved by £0.8m, recording a £0.4m profit (2017: loss of £0.4m). The improved underlying operating performance derives primarily from the Group's UK operations. Underlying Operating Profit is defined by the Board as Operating Profit from continuing activities prior to exceptional items and amortisation of intangible assets and includes the Group's share of the operating profit of its German associate. Operating loss under IFRS was £6.1m (2017: loss of £2.3m), due to the impact of the exceptional item noted below.

As previously announced, in October 2018, one of the Group's customers, Wolf Minerals, announced that it had ceased trading and subsequently it has moved into an insolvency process. As a result, the Group has incurred an exceptional loss of £8.1m, comprising a £5.1m write down of trade debt and WIP balances and £3m of redundancy and other associated costs.

After accounting for the exceptional item of £8.1m (2017: £2.8m), amortisation of intangible assets of nil (2017: £0.2m) and adjusting for tax on the profits of the German associate of £0.5m (2017: £0.7m), the loss before tax was £6.0m (2017: loss of £1.6m).

Brockwell Energy Limited

The Board was pleased to complete the sale of the entire share capital of Brockwell Energy Limited ("Brockwell") in October. The initial gross proceeds, including the reimbursement of certain costs, were £21.7m. A further £2m in cash may become payable, contingent upon the successful financial close of a future development project. A profit on the disposal of Brockwell of £4m, excluding the contingent consideration, has been recorded within Discontinued Operations. Hargreaves has retained certain freehold land assets on which Brockwell intends to develop renewable energy assets in the future and as a result the Group will continue to have a landlord/tenant relationship with Brockwell on arm's length terms.

Earnings Per Share

Underlying basic earnings per share from continuing operations increased by 54% to 5.4p (2017: 3.5p) and a loss per share of 2.6p (2017: loss per share 4.0p) on a reported basis.

Net Debt

Net debt was £28.6m (2017: £20.6m). This was £2.2m lower than reported at 31 May 2018. The increase when compared to 30 November 2017 is primarily due to higher levels of working capital in the Distribution & Services business as a result of revenue growth, outweighing the cash receipts from the sale of Brockwell and from the realisation of Legacy assets. During the first half of the financial year, £5.9m (2017: £0.4m) of Legacy assets were realised leaving a balance of £21.5m to be converted to cash. The Board expects to reduce net debt in the second half of the year as a result of the expected realisation of further Legacy assets, although the level of reduction will be tempered by the growth in working capital referred to above and investment in new Property opportunities.

Dividend

The Board has decided to maintain the interim dividend at 2.7p (2017: 2.7p). This will be paid on 8 April 2019 to shareholders on the register at 28 February 2019. The Board intends to return with immediate effect to a more conventional dividend payment policy, distributing approximately one third of the anticipated full year dividend at the interim stage and more generally will seek to increase dividends progressively, balancing this objective with continuing to reduce net debt.

Brexit

The uncertainty of the final outcome to the Brexit discussions is constantly in the headlines. As far as Hargreaves is concerned, the Group carries out almost all of its business wholly within the UK and has very little import/export activity with the EU. As a result, the Board does not expect any material direct impact on the Group's trading activities whatever the final resolution to Brexit may be. The German associate business, HRMS, trades almost exclusively within the EU but imports much of its trading stock from outside the EU so again no direct impact on their trading is expected. Of course, it is impossible to assess with any degree of accuracy the broader macro-economic impact of Brexit on either the EU or the UK.

Board Changes

I was pleased to succeed David Morgan as Chairman on 1 August 2018. David led Hargreaves through a particularly challenging period in its history and the Board thanks him for his services. Additionally, Peter Jones decided not to seek re-election as a non-executive Director at the Annual General Meeting held on 30 October 2018. The Board has commenced a process to appoint a new non-executive Director.

On 12 November 2018, David Anderson joined Hargreaves as Group Property Director, reflecting the Board's desire to build a substantial property development business as well as realising value from the Group's existing land portfolio.

Strategy

Following my appointment as Chairman, the Board conducted an initial review of strategy. Following this review, an historical risk analysis related to the CA Blackwell acquisition is being undertaken.

Looking forward, it was decided that there should be three key areas of focus. First, the realisation of cash from the disposal of surplus assets and non-core activities including the Legacy assets. Secondly, a focus to increase returns from the Distribution & Services business, including improving the profit resilience of Hargreaves Raw Material Services GmbH ("HRMS"), the Group's German based European specialist raw materials trading associate business. Thirdly, the development of the Group's Property business, Hargreaves Land, which the Board regards as an important area to generate greater medium and longer-term value. The recent recruitment of David Anderson as Group Property Director provides impetus and relevant operational experience towards achieving this objective. The Board considers that progress has been and is being made in all three areas.

Outlook

Notwithstanding the losses arising from the Wolf Minerals failure, these results indicate that the Group is making headway towards meeting its declared strategic objectives with further progress expected in the second half of this financial year. The Board anticipates reporting full year results in line with its expectations.

Roger McDowell

Chairman

30 January 2019

CHIEF EXECUTIVE'S REVIEW

Distribution & Services

The Distribution & Services business recorded revenue of £152.5m (2017: £146.8m) and an Underlying Operating Profit of £6.4m (2017: £5.6m). Operating loss under IFRS was £3.8m (2017: profit of £0.1m). When the revenue on legacy contracts within Specialist Earthworks is excluded, revenue increased by 5.0% to £150.4m (2017: £143.2m) and therefore the Underlying Operating Profit margin increased to 4.3% from 3.9%. Further information on the performance of each business within this segment is given below.

Production & Distribution

Revenue in Production & Distribution was £62.7m (2017: £76.3m). Revenue reduced as the business continued with the strategy of moving away from lower margin bulk products to focus on higher margin speciality coal sales. UK Underlying Operating Profit was maintained at £2.0m (2017: £2.0m). The coal production and processing sites at House of Water and Killoch in Scotland continue to yield a high proportion of speciality coals, pricing of which has remained strong. Favourable trading conditions are expected to persist in the second half of the financial year.

Additionally, the Group's German associate contributed £2.0m (2017: £2.4m). Trading conditions in the German market in certain speciality minerals have been slightly weaker than a year ago. It should be noted that this business has been traditionally stronger in the second half of the financial year although, as it is a trading business, market conditions can be unpredictable creating short term volatility. Currently, HRMS expects that second half trading will be no stronger than the first half performance. The construction of a Carbon Pulverisation Plant for HRMS remains on plan for completion in the second quarter of calendar year 2019 with initial production due to commence early in the next financial year.

Industrial Services

Revenue grew by 37% to £39.4m (2017: £28.7m) with an Underlying Operating Profit of £1.4m (2017: £0.3m) representing a margin of 3.6% (2017: 1.0%). The principal reason is an improved operating performance in the UK where revenue growth of 46% and an increase in margin to 5.1% from 3.0%, led to a £0.9m increase in Underlying Operating Profit. This has been driven both by new business being secured but also by a focus on operational efficiency and cost reduction. Increased levels of activity have caused an increase of approximately £6m in working capital levels which is expected to continue through the rest of the financial year.

As in previous years, the cyclical profiling of contracts and planned site outages in Hong Kong, means that operating profit in the overseas Industrial Services business, which reported a loss of £0.1m (2017: loss of £0.3m), will be heavily weighted to the second half in which a strong profit performance is expected. The Hong Kong business is currently focused on the renewal of the NEC Term Service Contract with its major customer. This process is expected to be concluded prior to the financial year end.

Specialist Earthworks

Excluding the impact of the three legacy contracts, the Specialist Earthworks business recorded revenue of £48.5m (2017: £38.6m) and an underlying operating profit of £1.0m (2017: £0.9m). Productivity has benefited from the good weather over the summer, resulting in stronger than expected revenue in certain contracts alongside increased revenue arising from dealing in plant.

The major contract in this business unit is the A14 bulk earthworks project which is expected to contribute over £20m in revenue this year. Future business opportunities with similar operational and contractual characteristics are being pursued including participation in the construction of the HS2 high speed rail infrastructure, where C.A.Blackwell has been selected as a preferred supplier by one of the major consortia.

During the period, the business suffered the loss of an important contract at the Hemerden tungsten mine in Devon as a result of the insolvency of the customer, Wolf Minerals. Full provision totalling £8.1m has been made against expected losses resulting from this which are reported within Exceptional Items. As a result of the termination of the Hemerden contract and as other contracts which are not in bulk earthworks reach their conclusion, the Board expects revenue in the second half of the year to reduce substantially in this business unit.

The three legacy contracts in C.A.Blackwell are now at the stage of agreeing final account settlements with clients and the supply chain. Whilst the Group is hopeful of reaching satisfactory agreements soon, some or all of these accounts may not be fully resolved during the current financial year which may mean a higher than expected level of working capital at the year end.

As previously reported, the Group is pursuing a claim against the vendors of C.A.Blackwell for breach of warranty. This matter is ongoing but is likely to take some time to reach a resolution. Costs in respect of the claim are being expensed as they are incurred.

Property

Property contributed £9.4m (2017: £3.1m) of revenue in the first half and an operating profit of £0.4m (2017: loss of £0.4m). The improved result derives from the sale of a number of parcels of surplus land which did not have sufficient cost-effective development potential to warrant retention.

Following his recruitment as Group Property Director in November, David Anderson has been considering how best to realise value from the existing portfolio of land assets as well as evaluating a number of other opportunities. The net book value of the land portfolio as at 30 November 2018 stood at £26.2m (2017: £31.8m). Since last year, some £10.6m of the comparative figure has been sold.

During the period, £4.2m of expenditure has been incurred installing infrastructure and services at the key Blindwells site near Edinburgh, where outline planning consent for 1,600 houses had already been secured. Substantial interest has been generated from residential developers and the Board is pleased to announce that a conditional contract for sale, valued at over £1m, has been signed in respect of the first development plot. Legal completion is principally dependent upon receiving detailed planning permission and associated statutory approvals.

Additionally, the Group is in the final stages of negotiating three development projects which the Board expects to conclude in second half of the financial year. These projects would require £4m of initial funding.

Last year, planning permission in principle was granted for an energy from waste ("EFW") plant and other industrial developments at Westfield, a former open cast coal mine in Fife. Hargreaves' former subsidiary, Brockwell Energy Limited, is now focused on the development of this EFW plant following the successful financial close of its other EFW project at Earl's Gate. Hargreaves retains 100% ownership of the Westfield site.

Legacy Asset Realisations

During the period sales of Legacy Assets amounted to £5.9m (2017: £0.4m) with no Underlying Operating Profit (2017: £Nil) being recorded. The remaining Legacy Assets of £21.5m (2017: £32.8m) comprise loans due from the Tower Joint Venture of £16.7m (2017: £17.5m) and surplus plant and machinery. The majority of the remaining Legacy assets are expected to be realised during calendar year 2019.

Capital Allocation

As the Group continues its process of transition, the Board's decision to invest in the development of Hargreaves Land together with the growth being achieved in the Industrial Services business is likely to lead to a lower than previously expected reduction in net debt by the end of the financial year.

Summary

During the period, it has been particularly satisfying to see the improvements in revenue and underlying operating margins inDistribution & Services and to have concluded the sale of Brockwell Energy Limited although the failure of Wolf Minerals has been an unexpected setback. The Property business, Hargreaves Land, has excellent prospects and I look forward to its success under David Anderson's leadership.

Gearing (measured as net debt compared to net assets) at the end of November 2018 was 21% (2017: 15%) but is expected to reduce in the second half of the year. The Group's strong balance sheet provides an excellent basis from which to generate sustainable returns and shareholder value.

Gordon Banham

Group Chief Executive 30 January 2019

Condensed Consolidated Statement of Profit and Loss and Other Comprehensive Income for the six months ended 30 November 2018

Unaudited Represented*Unaudited

six months

six monthsAuditedEnded

ended

year ended

30 November

30 November

31 May

2018

2017

2018

Note

£000

£000

£000

Revenue

167,872

150,268

297,119

Cost of sales

(160,238)

(138,167) (266,746)

Gross profit

7,634

12,101 30,373

Other operating income/(expense)

163

688 (185)

Administrative expenses

(13,854)

(15,108) (31,564)

Operating loss

(6,057)

(2,319) (1,376)

Operating profit (before exceptional items)

2,073

490

Exceptional items - Cost of sales 5

(8,130)

(2,809)

(3,025)

Operating loss (after exceptional items)

-

-

(6,057)

(2,319)

Financial income

98

328

626

Financial expenses

(1,001)

• (913) (1,937)

  Share of profit of associates and jointly controlled entities (net of tax)

  6

  932

• 1,324 3,175