Hargreaves benefits from speciality trading

14th Sep 2010 14:17

Despite production problems at the Maltby colliery and the weak economy Hargreaves Services continues to grow its profit and it is focusing on organic growth in the future. AIM-quoted Hargreaves reported an increase in underlying pre-tax profit from £28.6m to £34.3m in the year to May 2010, even though revenues fell by 9% to £503m. The fall in revenues was in the energy and commodities division, which also produced nearly all of the increase in profit. This was because the revenues were lost from power station and commodity coal trading business which is low margin. There was a sharp increase in the trading of higher margin speciality coal as Hargreaves builds up its European trading operations. Hargreaves has more than 60% of the UK market but less than 5% of the much bigger European market. The company emphasises that it is competing on quality rather than price. To put this in perspective power station coal margin fell to £2.69/tonne last year, whereas speciality coal margins increased from £13.36/tonne to £15.59/tonne. The average overall margin jumped from £6.24/tonne to £9.50/tonne. The only division to make a lower profit contribution was production as the Maltby colliery had its geological and machinery problems. Hargreaves is still waiting for a planning decision relating to the re-opening of production at Tower colliery. This is a joint venture with the miners. The decision should be known by the end of this year and, if it is positive, production could start soon after. Industrial services, which provides contract management for power stations, and the transport division both improved their contributions. One of the things that sticks out in the balance sheet is the high level of debt. Finance director Iain Cockburn points out that this partly down to two years of heavy capital spending. The spending in the next couple of years will be lower and the debt level should reduce. Net debt had risen to £88.2m at the end of May 2010. House broker Brewin Dolphin reckons that this should fall to £72.6m by the end of May 2011. Brewin Dolphin forecasts a rise in profit to £40.5m in the year to May 2011, helped by a recovery at Maltby. The shares are trading on around seven times historic earnings. That does not include any contribution from Tower. The focus of expansion will be on the European speciality coal trading market, getting the Tower colliery back into production and growing the RocPower biomass-based power generation business. Uncertainties about the government subsidies called ROCs (renewables obligation certificates) have hampered RocPower's progress. The first site is operational and there are another two potential sites, but the sector requires clarity. That is unlikely to be provided by the government until next spring so it won't really benefit Hargreaves until the next financial year. "With the change to the new face having been completed at Maltby, we are hopeful that production consistency will now improve. The board is encouraged by the start that has been made to the current financial year by the rest of the group and believes that the group is well placed to drive further profit growth and cash generation," it added. The dividend for the year rises 14% to 13.5p.