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Very much looking forward to seeing the details of the contract. I think once it’s all laid out in black and white, £50m MC and 30 p will be the new floor. But what do I know! Would be helpful for Cenkos to issue a new note once the deal is signed

I think assuming a 7% net profit margin is reasonable to factor in all associated supply and labour costs?

I am just being conservative. I included BMT fees and steel order (no margin for HARL). I am not an expert, however!

I took the contact price plus marginal inflation to be £1.7b, then assumed conservative 60% to be U.K. based revenue. This left £1b. Then I assumed 30% for design and other non HARL attributed revenue, which I think is the prudent thing to do until the details emerge. Then I looked at estimated margins and deduced 7-10% flow through.

Of the £700m FSS revenue, how much do you calculate will be left as profit? I have assumed 7-10% Prior losses mean profit before and after tax will be the same.

To clarify, I think the breakeven point will come in the next few months. The point I’m making is that the new revenue from the FSS contract should mostly flow through to the bottom line profit…

The bottom line is that we are looking at a minimum of £700m revenue to HARL and a minimum of £10m PAT for the 9 year contract.

Plus, the company is pretty much already at break even point (I believe from £80m revenue, which will be blown out of the water next year).

A very low P/E of 5 and assuming no revenue growth above and beyond this contract, we are looking at a minimum of a £50m market cap floor..

And I’m trying to take a worst case scenario approach here!

Funnily enough I sent this email to IR last Friday:

‘ Dear H&W team,

First of all, many congratulations on the recent FSS contract win - a truly revolutionary milestone, which will change the company’s fortunes greatly.

I know that the company is going to make a further announcement when the FSS contract is signed but may I ask if there will be a clarification/update to the 16 August 2022 company guidance on revenues and break even, in light of the FSS economics and impact on the business? My view is that the market is not able to fully value the contract based on relatively ambiguous guidance.

Further, is there any plan for Cenkos to issue an updated broker note off the back of the FSS contact win?

Lastly, what will the structure of the £77m capital investment take - will Navantia be loaning this or taking HARL equity?

Many thanks in advance for your response.’

Si-good point

https://www.linkedin.com/feed/update/activity:7001655432704335872

Harl shareholders wouldn’t oppose Navantia taking equity at a significant premium to £35m though! I just wonder if JW can broker a deal for them to invest at £50m plus valuation and take a decent chunk below 25%… Navantia will know how lucrative the FSS contract is!

I am intrigued to find out more about this £77m! Coupled with the new £100m financing, Harl is going to have circa £130m of untapped, agreed financing. Pretty monumental for a minuscule £35m AIM tiddler!

Good point. So you think the £77m will be an interest free loan. I just don’t see how the company can assume that level of debt…

Thanks. Re the £77m, it would be good to have Nav take a shareholding in HARL. Could itself be a major catalyst, as it would put a valuation far higher than £35 MC. EG - £30m investment for 30% stake plus the rest as a convertible loan or low interest loan… would HARL really be able to take on another £77 m in debt - that would put its total debt at quadruple the market cap??! The funny thing is that HARL is playing in such a different league than to a £35m MC AIM tiddler - something has to give!

How do we think this will be structured? Do we think Navantia will subscribe for shares in HARL?

Also, do we think that the IM gas storage project could be immediately sold after 16 Jan judicial review? My gut feeling is that offers of around £50 will have been put on the table - also backed up by Cenkos…

Thanks, Stokey.

The company should detail the economics quite clearly once the contract is signed.

One thing for sure is that this is going to become a much much bigger company than it is today.

If management execute as promised then this could be a wonderful share to own for the next few years.

What do we think about an equity placing? I think it makes sense only after the real value of this award has been reflected in the share price.

Completion of refinancing, details of signed contract and gas storage update should see this rerate towards £70m market cap within a couple of months, in my view.

So - here it goes...

Pre FSS contract win, the company stated:
1. FY 22 - £65-75m revenue expected
2. FY 23 - £100-£115m revenue target
3. FY 24 - £200-230m revenue target
4. Gross margins of 24-27%
5. Cash flow breakeven at £80-100m
6. Debt of £30m in interims but let’s assume £60m after Riverstone facility fully drawn

FSS contract:
1. 60% of £1.6b to be apportioned to the UK – let’s say conservatively 75% of which will go to H&W over say a 9 year period. That’s £720m total revenue or £180m total gross profit or roughly £110m total profit after tax.
2. H&W to receive £77m capital investment from the consortium.

In summary:
1. Current market cap of £35m.
2. FY 23 revenue likely to now exceed the £100-115m target, with the company becoming profitable for the first time.
3. The profit after tax on this contract alone will average out at £12.25m per year over the 9 year contract (obviously revenue and profit will be weighted towards later years).
4. Assuming a shocking P/E ratio of 5, and assuming the company generates no additional revenue over and above this contract, the company’s market cap would be £61.25m for FY23.
5. Factor in £77m capital investment and targeted revenue growth of £200m in FY24 and you can conservatively deduce £30m profit after tax for FY24, which at a P/E of 5, would lead to a market cap of £150m.
6. In summary, there is a clear pathway to making 400-500% over the next 24 months and that is being extraordinarily conservative and not even touching the sides as to how the FSS contract will revolutionise the company and its ability to win much bigger contracts.
7. On the company’s target of £500m revenue, I can easily see a valuation of £375m based on current margins – 10 times the current market cap.

A clear path to making money – and for once on AIM, not on the back of hope and hype but on the back of real contracted revenue, macro support and realistic strategic plans.

Even if the company totally fails to successfully gorge on the low hanging fruit, a £35m valuation is clearly ludicrous!

Director buys soon …

What do people make of the lack of Exec director / PDMR dealings in the recent fundraising? No dealing due to possession of inside Info?

Trading update coming on Monday Tuesday or Weds next week - confirmed to me by Daniel Wells. Should see this back above recent C suite buys at 35p next week and then back to 60 pence plus next year

I have no doubt the share price will bounce back but I’ve been let down by Managenent, who have presided over a total collapse in the company’s valuation and have seemingly failed to address a horrible work culture. It really hit home yesterday - maybe I’m getting ‘woke’