AI is all the rage but what’s good enough for Warren Buffett and his mentor is good enough for us
Supplier of mechanical and electrical services with yield of 7pc and earnings of £7m a year from Germany is an asset-backed play for any value investing portfolio
While artificial intelligence, technology, biotechnology and so-called momentum stocks are still all the rage, this column’s desire to march to a different beat and dig out deep value is bringing its rewards. If taking a good look at stocks that trade at or below book value may seem like it harks back to the 1930s and Benjamin Graham, Warren Buffett’s mentor, then frankly that’s all well and good.
It worked for him and the initial returns from this value investing perspective, bear close scrutiny.
Another candidate is now popping up on our screens – Hargreaves Services. The Durham-headquartered company looks like another asset-backed play for the portfolio.
Hargreaves Services derives the majority of its revenues from its infrastructure arm, where it provides mechanical and electrical services to major water and electricity utilities, as well as earthmoving and raw materials handling, in the UK, Southeast Asia and South Africa.
It also has a 9,000-acre bank of brownfield land, which it regenerates and sells to developers for a range of uses, including warehouses, renewable energy projects and residential development. Finally, it owns 49.9pc of the equity in HRMS, a German raw materials and recycling operation where Hargreaves has the right to the vast majority of the profits. More than 60 framework contracts, including those on the Lower Thames Crossing projects and Suffolk’s Sizewell C nuclear power plant, provide good visibility of earnings, even if the timing of land sales can be unpredictable and revenues lumpy, while cash returns from HRMS are expected to run at about £7m a year. A steady improvement in the housing market could boost the land business.
Following a deal with Just Group, which will provide an insurance policy in exchange for a lump-sum cash payment, Hargreaves Services no longer has to pump cash into its two defined benefit pension schemes at the rate of £1.8m a year. That further buttresses an already solid balance sheet and frees up cash that can be used to invest in the core operations, as well as pay dividends.
Hargreaves has already declared an 18p-a-share interim dividend and analysts expect the final dividend to reach the same level, for a total which equates to a yield of more than 7pc, more than covered by forecast earnings and backed by an asset-laden balance sheet. Such a sum means investors can wait patiently for Hargreaves to maximise returns from its multi-year infrastructure deals and land bank and persuade the market that its market value, £160m at the time of writing, looks low relative to net assets of £198m, or 605p a share. Questor says: buy Ticker: HSP
Share price at close: 498p
Update: AG Barr
Acquisitions bedding down well, a cooling of input cost inflation and future profit margin benefits from an investment programme all mean that AG Barr is showing growing profits and dividend with the prospect of more to come, especially as the drinks specialist has a net cash balance sheet.
This good news has been a long time coming from the Cumbernauld-based company with a market value of £615m. Carbon dioxide shortages, sugar taxes and the pandemic have all tested management, not to say Questor’s patience, but our 10pc capital loss will be all but offset upon receipt of the final dividend of 12.4p a share on June 7.
This takes our total dividends from the FTSE 250 company to 64.4p a share. Better still, it feels like it is coming through the worst.
Last month’s full-year results to the end of January show renewed like-forlike sales growth, a double-digit percentage operating margin and return on capital, as well as positive free cash flow. Margins could also start to expand once more as investment in efficiencies, buying Boost and a reorganisation of how independent retailers are supplied help to fortify core brands such as its iconic Irn-bru.
It is also deftly handling succession planning. When chief executive Roger White steps down this month, his replacement will be Euan Sutherland, previously a non-executive director at soft drinks leader, Britvic. A forward price-to-earnings ratio of about 15 for the fiscal year to January 2025, coupled with a forward yield of more than 3pc, looks like decent value. Hold.
Russ Mould is investment director at AJ Bell, the stockbroker
‘Our 10pc capital loss will be all but offset upon receipt of the final dividend of 12.4p a share on June 7’