US Edition Hargreaves Services
695p +15p
Questor says BUY
Questor this week reiterated a buy stance on coal-fired power station Drax because of its attractive dividend. Today, Questor reiterates the buy on Hargreaves Services, operators of the Maltby Colliery which supplies the station with its coal.
Hargreaves on Thursday issued a reassuring update in which it said that it expected to meet full-year expectations.
The company does not just operate a colliery, but it provides a whole integrated supply chain for the coal industry. Not only does it mine coal, but it transports the fuel to power stations through a fleet of more than 500 vehicles. The company even removes the ash and turns it into paving for footpaths. It is also one of the largest coke traders in Europe.
The group is also moving into renewable sources of energy through its RocPower unit and progress appears to be ahead of schedule with these operations. The division is developing small biomass power plants, and on Thursday announced the commissioning of the first of five planned engines at its site at Commonside Lane in Wakefield.
The site has passed its grid compatibility test and has already delivered electricity to the national grid. The next two generation sets are expected to start commissioning before the end of December, with the final sets due for commissioning early in the new year. Renewable Obligation Certificate (ROC) accreditation from Ofgem has been applied for and is expected shortly.
Hargreaves has located and secured options on a further five sites for biomass engines in Yorkshire and Lancashire.
The RocPower operation uses many parts of Hargreaves' existing supply chain. Each plant comprises a number of heavy fuel oil engines that have been adapted to run on a broad spectrum of sustainable renewable fuels. The fuel is sourced in large shipments by the group's joint venture, Rocfuel. The fuel is imported and managed by the Hargreaves team at the Immingham Port and will be distributed to the sites using its own tanker fleet.
Each plant can produce enough energy to heat 15,000 homes and reduces Hargreaves' carbon footprint, saving 41,000 tonnes of CO2 per year, which the company says is the equivalent of taking 90 trucks off the road. Management has targeted a maximum three-year payback on each plant.
The shares are trading on a May 2010 earnings multiple of 8 times, falling to 7.4 in 2011. At 1.8pc the dividend yield is not spectacular.
Hargreaves shares were recommended as a buy on February 22 at 542½p and they are now 28pc ahead compared with a market up 35pc. Typically, the company operates on long-term contracts so its earnings visibility is pretty good.
Following Thursday's update a number of brokers are preparing to upgrade forecasts. It is important to note that the group's business model has been so successful that it has produced an annual compounded rate of earnings per share growth of 50pc for the last four years.
It is likely that the RocPower unit will prompt a number of upgrades as each plant is commissioned, so the stance remains on the shares remains buy.