Shares in coal mining and logistics firm Hargreaves Services (LSE: HSP) rose by 9% after the firm announced its full-year results this morning.
Although revenue from continuing operations fell by 24% to £662.2m and underlying earnings per share fell by 25% to 93.9p, the firm’s dividend rose by 18% to 30p, giving a trailing yield of 8.6%.
Cash generation remained very strong, as the firm continues to sell non-core assets. Net debt fell from £68.8m to just £1m, while the firm’s cash balance rose from £31m to £41m.
Today’s results leave Hargreaves shares trading on a trailing P/E of just 3.7, with a dividend yield of 8.6%. The reason for this, of course, is that mining and supplying coal to UK power stations and steel works is a declining business.
Hidden value?
Hargreaves is very much a ‘cigar butt’ type value investment. Such deep-value investments can prove very profitable, but they can also be value traps which destroy investors’ capital.
Although Hargreaves shares trade at a 30% discount to their book value of 462p, there’s no guarantee that this value will be realised. It might equally end up being written off as the firm’s coal business declines.
Today’s results bring some extra clarity to Hargreaves’ strategy. The disposal of non-core assets is now pretty much complete. Going forwards, the firm will operate a scaled-back coal mining and trading business, alongside a successful but low-margin bulk logistics operation. This will increasingly handle biomass and waste, instead of coal.
To diversify away from coal, Hargreaves is hoping to use its substantial land holdings for onshore wind farms and housing developments. Both seem logical, but it’s too soon to say how successful either venture will be financially.
I own shares in Hargreaves, partly because I rate the firm’s management very highly and have been impressed by their actions so far. In my view, the shares remain a risky but potentially rewarding buy.
Johnston Press
Another cigar-butt type value play with a very low valuation is local newspaper group Johnston Press (LSE: JPR), which announced its interim results today.
Underlying earnings per share from continuing operations rose by 54% to 11.44p for the last six months, despite a 4.6% drop in underlying revenue, which fell to £128.9m. Today’s results suggest full-year earnings should be in line with expectations, leaving the firm’s shares on a 2015 forecast P/E of just 4.4!
Going digital?
Like its peer Trinity Mirror, Johnston is attempting to shift its business from printed newspapers to online.
The problem is that while 68% of Johnston’s readers are now online, only 20% of the firm’s advertising revenue comes from its online operations. The remainder comes from print, and print advertising revenue fell by 9.5% during the first half of the year. Revenue from newspapers sales was also 5% lower.
Johnston Press might find a solution to these problems, were it not for a rather weak balance sheet. Net debt at the end of the half year was £183m, and Johnston also has a pension deficit of £87m.
The firm doesn’t pay a dividend and is unlikely ever to do so in my view, as all of its surplus cash will be required to repay its debts and meet its pension liabilities. In my view, these liabilities make Johnston Press uninvestable.