Small Cap Value Report (11 Feb 2014) - HSP, MCB, DOTD

Tuesday, Feb 11 2014 by

Good morning! No amusing Radio 4 stories today, as I woke up one minute before the clock/radio was due to go off - isn't it surprising how often that happens, we obviously have some sort of internal clock (mine works intermittently only!). Apologies for not getting round to finishing off yesterday's report on my return from London, by the time I got to look at it, it was 10pm, and I was just too tired to process any more numbers. Will try to revisit Hyder Services profit warning later in the week.



Hargreaves Services (LON:HSP)

This is a company that cropped up on my radar last year, and they are holding another analysts' lunch today in London, which I've been invited to, so will report back my findings. The last one was very interesting, as it touched on all sorts of issues surrounding coal - HSP is the UK's largest coal distributor, and also has some surface mining interests too.

Rather than repeating the background, let me refer you to my previous reports which outlined the investing case here on 24 Sep 2013, and reported on their positive trading update here on 16 Dec 2013. My feeling is that this is a much mistunderstood company, and various problems have obscured a remarkably good track record of increasing profit in recent years;


The headline figures for the six months ended 30 Nov 2013 look really good - turnover is up 28% to £460.5m, underlying diluted EPS is up 7.4% to 65.0p, which is lower than the 25.1% increase in underlying operating profit, which suggests a higher tax charge this year. The interim dividend has been increased by a healthy 27.5% to 8.8p, which is consistent with what the company said last time I met them, in that the intention is to raise dividends by about 50% from last year's level, over the next couple of years.

Net debt is £95.2m, which is quite material in relation to the £280m market cap (at 850p per share), however I tend to disregard debt where it is matched by freehold property. There is considerable hidden property value within HSP, although I can't put a figure on that, but there will at some point be upside from surplus freehold property…

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Hargreaves Services plc is engaged in sourcing, producing, processing, handling and transporting carbon-based and other bulk materials throughout the United Kingdom and Europe. The Company's principal activities are the provision of haulage services, waste transportation, mineral import, mining and processing, together with specialist earthworks and related activities. Its segments include Coal Distribution, Industrial Services, Logistics and Specialist Earthworks. The Coal Distribution segment provides coal, coke, minerals, smokeless fuel and biomass products to a range of industrial, wholesale and public sector energy consumers. The Industrial Services segment provides contract management services to clients in materials handling and a range of other industrial sectors. The Logistics segment provides bulk logistics to customers across the United Kingdom. The Specialist Earthworks segment provides earth moving, civil engineering and infrastructure services across the United Kingdom. more »

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McBride plc is a provider of private label household and personal care products. The Company is engaged in developing, producing and supplying its products to retailers across Europe. Its segments include Household and Corporate. The Household segment consists of UK; North, including France, Belgium, Holland and Scandinavia; South, including Italy and Spain, and East, including Germany, Poland, Luxembourg and other Eastern Europe. The Company's brands include Surcare, Clean and Fresh, McBride Direct, Limelite and Ovenpride. Its Surcare product range includes Surcare Sensitive Capsules, Surcare Sensitive Non-Bio Powder, Surcare Sensitive Non-Bio Powder and Surcare Sensitive Fabric Conditioner. The Company operates approximately 18 manufacturing sites in over 12 countries. more »

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dotdigital Group Plc is a United Kingdom-based company, which is engaged in providing software as a service (SaaS) and managed services to digital marketing professionals. The Company offers dotmailer, which provides e-mail and multi-channel marketing automation platform with various tools that enable marketers to create, manage, execute and evaluate various campaigns. In addition to its automation technologies, the Company also provides multi-channel marketing consultancy and services for businesses seeking to manage customer acquisition, conversion and retention. The Company also has pre-built integrations with e-commerce platforms and customer relationship management (CRM) products, such as Magento and Salesforce. dotmailer helps in using contact data to design, test and send automated campaigns. The Company's subsidiaries include dotmailer Limited, dotsearch Europe Limited and dotmailer Inc. Through its subsidiaries, it is engaged in providing Web- and e-mail-based marketing. more »

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  Is LON:HSP fundamentally strong or weak? Find out More »

11 Comments on this Article show/hide all

Beginner 11th Feb '14 1 of 11

Hi Paul
I have been tempted by Hargreaves Services (LON:HSP), but the debt puts me off. You counterbalance that with freehold property. Would it be worth asking about the nature of that property today? If it is redundant workings, its value may be minimal. Formerly these sites were used as landfill, but that is now ending. Returning such ground to viable usage is in fact very costly and therefore sites could be seen as liabilities rather than assets. Thanks.

(Additionally if the ground is up here in the grim north, it is also of very limited value.  I can still buy a house around here on my credit card; there is an over-abundance of brown field sites; and I can assure everyone there is no economic recovery here whatsoever).

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Sully8786 11th Feb '14 2 of 11

Hi Paul,

I've held Hargreaves Services (LON:HSP) for some time and reduced my holding by 50% at around 900p.

The SP has gone sideways for some time now but back in the day it seemed to be riding a more positive wave at around 1200p.

Then Maltby issues struck followed by the finacial irregularities in the Belgium office and the SP hasn't moved too much since.

I agree with your thoughts but there will need to be a catalyst of some sorts to get the SP moving in the right direction - maybe that will be Scotland??

Grateful to hear your thoughts following the investor lunch...



Company: Dave Sullivan - Talking Stocks
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Paul Scott 11th Feb '14 3 of 11

In reply to post #81287

Hi Beginner,

I asked them about the freehold property back in Sep 2013, but they don't want to publish any details about it at the moment, as that could create bad publicity and make them look like asset strippers.

However, they do have some land holdings that could be very valuable for property development, especially a large site near Edinburgh. There is a profit share arrangement (15% from memory?) with a local development fund I think.

I got the impression that long term, there could be significant upside from the property side of things, which the company is likely to become more open about over the next couple of years. So that could be the value catalyst that people are seeking, possibly?

I don't have any hard figures, but in my view it's probably safe to think in terms of the property development upside clearing most or all of HSP's net debt in the coming years. I'll try to get some confirmation on that at today's lunch.

Regards, Paul.

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Beginner 11th Feb '14 4 of 11

In reply to post #81289

Cracking Paul. Thank you.

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marben100 11th Feb '14 5 of 11

Hi Paul,

Another reason for the apparent slow profits growth this half at DOTD is that they're in the process of discontinuing a services part of the business, which causes some drag on overheads. Once that's fully discontinued, overall profits should improve. They also mention that due to their Saas business model, there is a lag between new business being won and that business generating regular revenues.

In this era, maintaining e-mail contact with customers (& suppliers) is essential for most businesses, so having an effective e-mail management system is crucial. It is up to the business to ensure that e-mails are as relevant as possible and used judiciously. I believe dotMailer assists in achieving that aim. Sensible businesses should avoid sending e-mails that their recipients might consider to be spam.


DISCLOSURE: I hold dotDigital.



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jjis 11th Feb '14 6 of 11

Hi Paul,
Thanks for the write up on Hargreaves Services (LON:HSP) as it is one I hold and I have written it up on Stockopedia recently. The eps is showing lower growth as the weighted average diluted number of shares in the period increased from 27.8m to 33.2m following the equity raise in May 2013 which funded the acquisition of the surface coal mining assets in Scotland. The tax charge actually declined from 27.3% at the last year end to 23.2% in these numbers reflecting the fall in the UK corporation tax rate from 23% to 21% and the exceptional goodwill write-off last year that was treated as non-deductible. If anyone is interested I have added an update on the results on my Compound Income? site. Will be interested to hear your feed back on the lunch, hopefully cheap sandwiches if the company are paying!

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Cisk 11th Feb '14 7 of 11

Paul, interesting comments re:HSP. They are right to be cautious about coal in the UK, however what the regulators want and what is achievable in the short / medium term are very different things. The UK power generation industry is underfunded and policy is unclear; so coal won't be disappearing any time soon.

Also technology is improving to 'clean' the outputs from coal fired stations.

And there is a sizeable export market for coal, China for example has a huge amount of coal fired stations that are relatively new and won't be replaced quickly.

In short, renewables yield so little comparatively and the lead time for any viable source of generation is so long I don't see coal being replaced soon.

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kevanp 11th Feb '14 8 of 11

In reply to post #81293

I am a Hargreaves Services (LON:HSP) holder, and have faith in them doing a WH Smith (LON:SMWH). It would be interesting to know what their long term plans are, given their view of the inevitable decline in the use of coal — albeit over a potentially long period.

But… I'm not holding my breath about the viability of exporting coal to China! China produces over 3.5 billion tons of coal a year. OK, they do import about 300 million tons, but they are surrounded by the world's largest exporters: Indonesia, Australia, and Russia. Somehow I can't see much chance of HSP muscling in on this play.

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cr6196 11th Feb '14 9 of 11

This is the project, more details are available from the council but running the numbers suggests that the profit on this will be well in excess of the price paid to Scottish Coal and if the company makes above average margins, which it should, it may be multiples. Either way, this is the project.

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Maddox 11th Feb '14 10 of 11

Hi Paul,

Thanks for your daily pearls of wisdom - excellent.

I agree fully with your analysis of McBride. Strategically, a business that is producing own brand products for the likes of Tesco are never going to have pricing power - hence the low margins. They will also be forced into regular product and packaging revamps - hence the high depreciation charge. One to avoid.

 Cheers, Maddox

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Beginner 11th Feb '14 11 of 11

Hargreaves Services (LON:HSP) already have contracts in Hong Kong, though for engineering support rather than supply, so there is a China connection there already. Those support services, and general logistics provision, may well be the best way forward.

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 Are LON:HSP's fundamentals sound as an investment? Find out More »

About Paul Scott

Paul Scott

I trained as an accountant with a Top 5 firm, but that was so boring that I spent too much time in the 1990s being a disco bunny, and busting moves on the dancefloor, and chilling out with mates back at either my house or theirs, and having a lot of fun!Then spent 8 years as FD for a ladieswear retail chain called "Pilot", leaving on great terms in 2002 - having been a key player in growing the business 10 fold. If the truth be told, I partied pretty hard at the weekends too, so bank reconciliations on Monday mornings were more luck than judgement!! But they were always correct.I got bored with that and decided to become a professional small caps investor in 2002. I made millions, but got too cocky, and lost the lot in 2008, due to excessive gearing. A miserable, wilderness period occurred from 2008-2012.Since then, the sun has begun to shine again! I am now utterly briliant again, and immerse myself in small caps, and am a walking encyclopedia on the subject. I love writing a daily report for on most weekday mornings, constantly researching daily results & trading updates for small caps. Cheese! more »


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