Hargreaves Serv Regulatory News (HSP)

17 Feb 2009 07:00



HARGREAVES SERVICES PLC 

(the "Group" or "Hargreaves")

Interim Results for the six months ended 30 November 2008

Hargreaves Services plc (AIM: HSP), a leading supplier of products and services to the energy, waste and minerals sectors announces its interim results for the six months ended 30 November 2008. 

HIGHLIGHTS

Record results, in line with recently upgraded expectations

Remaining 50% of Coal4Energy acquired in January for £9m

JV signed with Evonik, a major German power station operator, to merge and jointly develop UK ash businesses

Belgian coal operation commenced in November 2008

Renewables business developing faster than expected

Joint venture signed to investigate a 4m tonne surface coal opportunity at the former Tower Colliery

Interim dividend increased 15% to 3.8p 

Intention to investigate a move to main market in the next 12 months

(1) Underlying operating profit is stated excluding the amortisation of acquired intangibles and release of negative goodwill and including share of profit in jointly controlled entities and associates 

(2) Underlying profit before tax and EPS is stated excluding the amortisation of acquired intangibles and release of negative goodwill

Commenting on the interim results, Chairman Tim Ross said: "Hargreaves remains well positioned in the resilient energy, waste and minerals sectors, dealing primarily with large blue chip customers. The Group's strategy of locking in long term contracts continues to provide a strong degree of protection from fluctuations in short term commodity prices. The Group is delighted to have completed the recent acquisition of the remaining 50% of Coal4Energy and the Board remains upbeat on the Group's future prospects."

For further details:

  INTERIM STATEMENT

Hargreaves Services plc (the "Group" or "Hargreaves") announces it's interim results for the six months ended 30 November 2008. 

RESULTS

We are pleased to announce another record set of results for the Group. Revenue increased by £122.2m from £174.3m in the 6 months to 30 November 2007 to £296.5m in the six months to 30 November 2008. Operating profit before amortisation of intangibles and including share of profit from joint ventures ("underlying operating profit") increased 76% from £9.2m to £16.2m. Profit before tax and amortisation of intangibles ("underlying profit before tax") increased by 96% from £7.1m to £13.9m. Reported profit before tax increased from £6.6m to £12.2m. 

TRADING AND BUSINESS REVIEW

PRODUCTION DIVISION

The Production Division had a strong first half, underpinned by a good production performance from Maltby Colliery that was uninterrupted by face changes. A face change was budgeted for the second half and is currently progressing well. The recently purchased high specification face equipment is starting to produce coal on the new T11 face which is due to run until May 2010. We are also pleased to report that the new methane gas engine ordered in the last financial year is now being commissioned and should be on-line by the end of February. We continue to investigate additional methane opportunities. Production costs at the mine for surface fuel, steel and contractors are running higher than budgeted, although these costs are forecast to fall again through the second half.

Although commodity prices, including those of coal and coke, have fallen significantly from their peaks of last summer, Sterling has also weakened against the US Dollar and as a result the benchmark price for coal (API2) is still approximately £15 per tonne, or 35%, higher than it was when Hargreaves acquired Maltby Colliery in February 2007. 

The Group continues to benefit from having sold product on long term contracts. All of this year's coal production and all but 15,000 tonnes of this financial year's coke production are sold at this time. Although the outlook for commodities remains uncertain, the Group is confident that it will be able to sell its product based on the quality characteristics of the Maltby coal and resulting coke.

First half performance also benefitted from the shipment of an exceptional order of product from Monckton. Stock for this 50,000 tonne shipment had been built over the first half and had been budgeted for December but was shipped in November at the request of the customer. Although there is no net impact on the Divisions's result for the year the order referred to above that was pulled into the first half will reduce second half profits.

Although not significant in Group terms, we have worked hard at reducing losses at Monckton Rubber Technologies. We have succeeded in producing a high quality scrap wire and identified high value channels to market for this wire. Recent disruption in the scrap steel markets has however hampered our ability to achieve our targeted wire volumes and prices. 

We are also pleased to announce that we have been selected as a partner by Tower Colliery to develop a major open cast opportunity at the Tower Colliery site in South Wales with the potential to yield 4 million tonnes of coal. The Group continues to investigate other surface coal opportunities with a view to increasing the supply of coal products into the Energy & Commodities Division. We believe that our access to power station, industrial and domestic channels to market, together with our ability to reach both domestic and European markets, provides us with a unique foundation to maximise margin opportunity from the supply of additional product.

ENERGY & COMMODITIES DIVISION

The UK mineral operations have had a strong first half with volumes continuing to run close to capacity. These volumes were underpinned by our forward order book and robust power station demand. 

We are delighted to have completed the acquisition of the remaining 50% of Coal4Energy Limited from UK Coal plc in January for a consideration of £9m. Following the acquisition, Coal4Energy has entered into a 5-year exclusive contract with UK Coal PLC for the supply of coal into the industrial and domestic markets. Coal4Energy has traded strongly for the first half and is set to achieve a significant increase in profits compared with the prior year. The Group believes that under sole ownership we will be able to drive significant additional margin opportunities in both the UK and European markets.

The European mineral operations traded strongly in the first half, although reductions in activity levels, particularly in the European steel sector, are now feeding through to reduced new order levels. The order book remains sufficiently high to ensure that we are still confident that Germany will achieve its internal targets for the year. Trading volumes in other refractory minerals, at this time, appear less affected by the current downturn and we are pleased to announce we have signed a significant new agency agreement for a Russian refractory mineral producer during the first half.

During the first half we established a subsidiary operation in Belgium (Hargreaves Carbon Products NV) to start processing and trading coal products from a base in Ghent. Although our expectations for organic growth are modest, we are confident that the operation will develop quickly through the leadership of the experienced local management with whom we have partnered, and by leveraging both the Group's coal procurement and sourcing capabilities and it's coal facilities at Immingham and Newport.

In the first half we have also seen our renewable fuels venture, RocFuel, starting to trade its first material cargos and we are confident that it will achieve profitability in the second half. We are continuing to actively appraise investments in the distributed generation sector through our RocPower subsidiary.

Following the previously announced reorganisation of our ash business that resulted in the disposal of our interests in Lytag Limited in return for the acquisition of a greater stake in the ash trading operations of Hargreaves Building Products Limited, we are pleased to announce that we completed the merger of our ash business with the UK operations of Evonik GmbH, a major player in the German power market. This merger provides the joint venture with exclusive rights to bring Evonik's ash based minerals into the UK and will also provide the opportunity to work with Evonik GmbH to bring their ash technology and expertise to further develop our market leading position. This is an important strategic partnership for the ash business and will provide an increased range of options for customers to deal more effectively with the growing problem and potential cost of ash disposal.

TRANSPORT DIVISION

The Bulk Material transport fleet continues to operate in a challenging environment with major volume declines in the construction and aggregate sectors. Although this business unit will fall short of its internal targets this year, it will continue to benefit from strong coal and inter-group volumes and we are pleased with progress towards a number of new contracts in the cement, coal and aggregate sectors that should generate additional volumes later in the second half of this calendar year. 

The integration of Hargreaves Bulk Liquid Tankers and Imperial Tankers has been completed. The merged Bulk Tanker operations continue to operate under the Imperial brand and have proved more resilient than Bulk Materials, benefiting from a strong core of long term contracts. Although we are starting to see reduction in some of the product flows, the division's reputation for reliability and quality has so far provided compensating contract wins. Despite the current climate we remain cautiously optimistic that the tanker division will achieve its current year internal targets.

The Waste transport division has had a solid first half and continues to enjoy the benefits of operating long term contracts in a very resilient sector. The division is actively pursuing a number of new contract opportunities.

INDUSTRIAL SERVICES DIVISION

Industrial Services had a solid first half. Revenues have increased as a result of contracts won in the second half of last year. We have increased spending on business development and sales resources, both for the core business and for the newly acquired AJS and would expect to see incremental contract wins starting to come through in the second half. We are pleased with the initial integration of AJS. In its core business, AJS had a quiet first half after successfully completing two major outage projects in June 2008. We expect it to perform strongly in the second half, as two major power station outage projects are contracted to take place between February and April. As a result we expect an increase in margin and profitability in the second half. Bulk warehousing continues to perform steadily.

We are also pleased to announce that the Division won an important new contract extension and renewal with British Energy for services at Eggborough power station.

BUSINESS DEVELOPMENT

As part of the development of the business, the Board has given consideration to the merits of moving from AIM to the main market. Given the increasing scale of the Group's activities and our ambitions, we have concluded that we should investigate a transition to the main market within the next 12 months.

FINANCIAL REVIEW

Revenue

Revenue increased by £122.2m from £174.3m in the 6 months to 30 November 2007 to £296.5m in the 6 months to 30 November 2008, driven mainly by the impact of increased commodity prices on the mineral purchases and sales in our Energy & Commodities Division.

Operating Profit and Margins

Underlying operating profit increased by £7.0m from £9.2m to £16.2m. Overall group underlying operating profit margin increased to 5.5% in the six months to 30 November 2008 from 5.3% for the six months to 30 November 2007. Over that period, underlying operating margin improved strongly from 13.7% to 23.2% in the Production division as it overcame the production challenges experienced in the 6 months to 30 November 2007 and benefited from an exceptional 50,000 tonne order of product from Monckton that had been budgeted for the second half. Although underlying operating profit in the Energy & Commodities Division increased strongly, underlying operating margin fell from 2.7% to 2.2% due to the impact of higher commodity prices on revenues. Industrial Services Division's underlying operating profit and margin increased as incremental revenues contributed margin, easily offsetting investment in AJS integration and incremental business development resources. The reduced profitability of the Bulk Materials transport fleet in the 6 months to 30 November 2008 pulled down the overall Transport Division margins by 0.1%, offsetting the positive effect of a full 6 month's contribution from Imperial Tankers.

Interest

In the 6 months to 30 November 2008, the net finance charge for the Group increased by £0.2m from £2.1m to £2.3m in the 6 months to 30 November 2008. The increase is a result of higher average net debt levels offset by the impact of lower interest rates starting to work through. Interest cover remained strong at 9.8x compared 6.8x at the end of November 2007.

Taxation

The tax charge for the first half was estimated at £3.9m compared with £2.1m for the six months ended 30 November 2007. This charge represents an estimated underlying effective tax rate for the Group, stated prior to amortisation of acquired intangibles of 27.9% compared with 29.9% for the comparative period. 

Earnings per Share

Reported basic earnings per share increased from 15.7p to 29.0p. Underlying fully diluted earnings per share increased by 101% from 17.4p to 34.9p.

Dividend

The Board has recommended an increase of 15.1% in the interim dividend from 3.3p to 3.8p. The dividend will be paid on 24 March 2009 to all shareholders on the register at the close of business on 27 February 2009. Dividend cover is a comfortable 7.6x.

CAPITAL STRUCTURE

Net Debt

Cash performance was in line with our expectations and, as always, remains an area of management focus. Net Debt increased from £46.2m at 31 May 2008 to £72.9m at 30 November 2008. This increase was in line with our internal projections and reflected the seasonal working capital build together with the planned programme of investment at Maltby. Net equity increased from £48.1m to £62.1m. The Group's financial position remains strong with net debt at 30 November 2008 less than 1.6x earnings before interest, tax, depreciation and amortisation ("EBITDA") compared with 2.0x at 30 November 2007. 

The Group continues to enjoy access to adequate facilities and is able to borrow at competitive rates. Gearing (measured as net debt compared to net equity) at the end of November 2008 was 117% compared with 136% at the end of November 2007. 

Following the end of the first half, in January 2009, the Group took out a 3 year £9m term loan at 2.25% over LIBOR to finance the acquisition of the remaining 50% of Coal4Energy. Although the acquisition will increase net debt in the short term, we are confident that Coal4Energy will be both highly profitable and cash generative.

Cash Flow 

EBITDA for the six months to 30 November 2008 was a record £22.5m but cash flow from operations was impacted by the £27.1m increase in working capital as a result of the issues described above. All material mineral stocks at 30 November 2008 had been forward sold so the Group has no commodity price exposure. With the last of the major seasonal cargos coming in during December, the Group's mineral stocks will reduce significantly in the second half.

Capital Expenditure

Net capital expenditure in the first half was £12.5m compared with £5.4m in the six months to 30 November 2007. The increase was primarily due to the scheduled and previously announced acquisition of a new set of face equipment for Maltby Colliery together with scheduled fleet replacements for both the bulk material fleet and the bulk tanker fleet. 

CURRENT TRADING AND OUTLOOK

The economic downturn has had significant impacts on many sectors including construction, steel making and mining. However, the Group continues to benefit both from having a broad range of diversified revenue steams within the relatively resilient energy and waste sectors, and from its strategy of locking in long term sales contracts with strong counterparties. The majority of business units and divisions are performing strongly. Weaknesses in the bulk material transport business unit resulting from the current downturn in the construction sector and at Monckton Rubber Technologies due to the current drop in demand for scrap products have been outweighed by favourable trading in the other more substantial parts of the Group.

We remain optimistic about the long term prospects for carbon based products and will continue to invest in the Production Division, including the delivery of the mine life extension at Maltby and the investigation with Tower Colliery to develop surface mining activities and market the resulting product. We are excited by the Coal4Energy acquisition and expect that we can drive additional synergies and growth opportunities from that platform.

We remain optimistic about the longer term prospects of the other divisions and believe that both bulk transport fleets, materials and tankers, are well placed to benefit from any upturn in business levels.

We will continue to closely monitor economic conditions and commodity price trends and maintain a strong focus on delivering operational performance, profit delivery and the management of cash flow. We will continue to investigate a number of exciting organic investment opportunities, particularly around renewable fuels and surface coal development, as well as keeping a very selective watch for any key strategic acquisition opportunities that may present themselves during the coming year. The Group expects to deliver a full year result in line with recently upgraded market expectations.

CONSOLIDATED INCOME STATEMENT 

FOR THE SIX MONTHS ENDED 30 NOVEMBER 2008

  CONSOLIDATED STATEMENT OF RECOGNISED INCOME AND EXPENSE 

FOR THE SIX MONTHS ENDED 30 NOVEMBER 2008

  CONSOLIDATED BALANCE SHEET 

AS AT 30 NOVEMBER 2008

  CONSOLIDATED BALANCE SHEET (CONTINUED) 

AS AT 30 NOVEMBER 2008

  CONSOLIDATED CASH FLOW STATEMENT 

FOR THE SIX MONTHS ENDED 30 NOVEMBER 2008

  CONSOLIDATED CASH FLOW STATEMENT (CONTINUED)

FOR THE SIX MONTHS ENDED 30 NOVEMBER 2008

1. Basis of preparation

This interim statement for the six months ended 30 November 2008 and the comparative figures for the six months ended 30 November 2007 are unaudited. This financial information does not constitute statutory accounts as defined in Section 240 of the Companies Act 1985. It does not comply with IAS34 'Interim Financial Reporting', as is permissable under the rules of the AIM market ("AIM").

These interim financial statements have been prepared in accordance with the measurement and recognition criteria of Adopted IFRS's. They do not include all the information required for the full annual financial statements, and should be read in conjunction with the financial statements of the Group as at and for the year ended 31 May 2008.

2. Accounting policies

The accounting policies applied in preparing these interim financial statements are the same as those applied in the preparation of the annual financial statements for the year ended 31 May 2008, as described in those financial statements.

3. Status of financial information

The comparative figures for the financial year ended 31 May 2008 are not the company's statutory accounts for that financial year. Those accounts have been reported on by the company's auditors and delivered to the registrar of companies. The report of the auditors was (i) unqualified, (ii) did not include a reference to any matters to which the auditors drew attention by way of emphasis without qualifying their report, and (iii) did not contain a statement under section 237 (2) or (3) of the Companies Act 1985.

4. Taxation

Taxation is based on the estimated effective rate for each year as a whole, including deferred tax.

5. Dividends

The dividend of 7 pence per ordinary share, proposed in the 2008 Annual Accounts, agreed by the shareholders at the Annual General Meeting on 3 November 2008 and paid on 12 November 2008, has been charged to reserves in these interim financial statements.

The directors have recommended an interim dividend of 3.8 pence per share which will be paid on 24 March 2009.

6. Earnings per share 

Earnings per share for the ordinary shares are as follows:

The calculation of earnings per share is based on the profit for the period/ year attributable to equity holders and on the weighted average number of shares in issue and ranking for dividend in the period.

6. Earnings per share (continued)

The calculation of diluted earnings per share is based on the profit for the period/ year and on the weighted average number of ordinary shares in issue in the period/year adjusted for the dilutive effect of the share options outstanding.

  7. Segmental information

8. Interim results

These results were approved by the Board of Directors on 17 February 2009. Copies of this interim report will be sent to all shareholders and will be available to the public from the Group's registered office.