Hargreaves Services - who would be a UK coal miner?

Hargreaves Services (HSP.L): Today’s trading update, for the year to 31^st May 2015, made for pretty sombre reading. Current trading has been ‘broadly in line with management’s expectations’, which usually means ‘we have come up a bit short’. Ongoing trading sounds difficult with low coal prices and coal power station closures hurting profits. The board is still holding out for an eventual recovery in coal prices, but relying on Government support to bolster the coal industry sounds unlikely. I fear from Hargreaves’s perspective that few people care enough about the industry and coal is firmly labelled as a dirty fuel to be shunned. They look to me to be on their own. Meanwhile, more than the targeted £3.0m has been chopped off the cost base, but further re-trenchment of the group will see a new £4.5m charge (redundancies, ineffective fuel hedges and mine reserve costs). They have also now given up chasing all the money they expected from the Liverpool Biomass Conversion project, which will result in a £2.4m charge, but release £10m of trapped cash. The board’s cash generation exercise has gone well though, with year end net debt just £1.0m, after £6.3m of share buy-backs, but helped by £8.0m of timing differences.

The shares have been terrible this year, having nearly halved and are languishing at 320p. For the year running to 31^st May 2015, consensus eps is 98p, for a PE of 3.3x, with a 30p dividend (we hope) giving a whopping yield of 9.4%. Looking ahead to FY2016, consensus eps of 49p point to a PE of 6.5x. The share price is telling you that these numbers are too optimistic. Back at the interims the board stated that they were targeting a 40% dividend payout, so 30p on 98p of eps would be possible for FY2015. They also stated that, if cash cover was sufficient, they would hold the dividend through a profit dip. Even with a strong balance sheet, to pay out 30p of dividend in FY2016 on (toppy) forecast eps of 49p is beginning to look a luxury. Many an investor has come away with a bloody nose from trying to make money our of UK coal and the risks at Hargreaves look too high for all bar the most adventurous investor. (Neil Cumming^, 2^nd July 2015)

These comments are not a personal recommendation to deal. Any investments can fall as well as rise in value, so you could get back less than you invest. I may have a financial interest in some of the stocks written about. www.dividendpower.co.uk or e-mail at info@dividendpower.co.uk  Twitter:  @DividendPower