Preliminary Results

RNS Number : 3982U

Hargreaves Services PLC

29 July 2020

 

For immediate release

29 July 2020

HARGREAVES SERVICES PLC

(the "Group" or "Hargreaves")

Preliminary Results for the year ended 31 May 2020

Hargreaves Services plc (AIM: HSP), a diversified group delivering key services to the industrial and property sectors, announces its preliminary results for the year ended 31 May 2020.

KEY FINANCIAL RESULTS

Year ended 31 May	2020		2019
Revenue		£222.2m	£302.6m
Operating Profit/(loss)		£1.3m	£(9.7)m
Underlying Profit Before Tax*		£4.9m	£6.4m
Profit/(loss) Before Tax		£2.2m	£(9.9)m
Basic earnings/loss per share from continuing operations		13.4p	(25.7p)
Underlying basic EPS* from continuing operations		19.9p	15.3p
Final Dividend		4.5p	4.5p
Net Debt (after IFRS 16 adjustments)		£28.1m	£24.5m
Net Assets		£130.1m	£127.5m
Net Assets per Share		403p	397p

* Underlying Profit Before Tax and underlying basic EPS is stated prior to exceptional items, fair value adjustments, amortisation and impairment of intangible assets, fair value gains on acquisition and includes the Group's share of the post-tax profit in joint ventures, see note 6.

HIGHLIGHTS

· Underlying performance of the Group has been satisfactory

· Revenue fell as expected to £222.2m (2019: £302.6m) as Specialist Earthworks awaits HS2 contract full mobilisation

· Impact of Covid-19 on Distribution & Services trading has been modest

· Underlying PBT lower than prior year due to sales at Blindwells delayed to FY21 by Covid-19

· £25m conditional contract exchanged at Unity Joint Venture for a 32 hectare commercial development

· Decision to cease coal mining results in a £4.1m exceptional charge

· Progress at German Joint Venture

o  Carbon Pulverisation Plant now operational

o  DK Recycling delivering break even performance since acquisition in December 2019

· Christopher Jones appointed as Non-executive Director on 1 April 2020

· Final dividend of 4.5p (2019: 4.5p) maintained following cancellation of interim due to Covid-19

Commenting on the preliminary results, Chairman Roger McDowell said: "My second annual report as Chairman is set against the background of the Covid-19 coronavirus pandemic which has impacted all of our personal lives and many businesses in an unprecedented manner. The Board has prioritised the health and safety of our employees above all else during this time and I am very grateful to all of our employees who have continued to support the business and work hard through this difficult period. Whilst Covid-19 has caused some delay to transaction completions within the Hargreaves Land business, the rest of the Group has been able to continue to trade without any material adverse impact and I would characterise the year as one of solid progress by the Group."

Analyst meeting

An online meeting for analysts will be held at 9.30am this morning, 29 July 2020. Please contact Buchanan on 020 7466 5000 or at [e-mail] for further information.

Enquiries:

Hargreaves Services plc Gordon Banham, Chief Executive Officer John Samuel, Group Finance Director	0191 373 4485
Buchanan (Financial PR) Mark Court / Henry Wilson	0207 466 5000
N+1 Singer (NOMAD and Joint Corporate Broker) Sandy Fraser / Rachel Hayes / Justin McKeegan	020 7496 3000
Investec (Joint Corporate Broker) Sara Hale / David Anderson/ Shalin Bhamra	020 7597 5970

 

Chairman's Statement

Roger McDowell, Group Chairman

Introduction

My second annual report as Chairman is set against the background of the Covid-19 coronavirus pandemic which has impacted all of our personal lives and many businesses in an unprecedented manner. The Board has prioritised the health and safety of our employees above all else during this time and I am very grateful to all of our employees who have continued to support the business and work hard through this difficult period. Whilst Covid-19 has caused some delay to transaction completions within the Hargreaves Land business, the rest of the Group has been able to continue to trade without any material adverse impact and I would characterise the year as one of solid progress by the Group.

Results

Revenue from continuing operations was £222.2m (2019: £302.6m). This reduction was in line with expectations as the Specialist Earthworks business completed a number of major contracts in the previous financial year and the full mobilisation of the HS2 project has been delayed.

Underlying Profit before Tax (see footnote below) from continuing operations for the year was £1.5m lower than the prior year at £4.9m (2019: £6.4m) as a result of land sales being delayed into FY21 by Covid-19. Further information on the trading performance of the Group's businesses is given in the Chief Executive's Group Business Review.

After a tax credit of £2.1m (2019: £1.7m), the profit for the year from continuing operations was £4.3m (2019: loss of £8.2m). Basic underlying earnings per share from continuing operations were 19.9p (2019: 15.3p) and 13.4p (2019: loss of 25.7p) on a reported basis.

Exceptional items

Following the large exceptional losses incurred last year as a result of the liquidation of both Wolf Minerals and British Steel, I am pleased to report that the Group has been successful in recovering £3.8m of value to date against these losses.

On 2 June 2020, we announced the cessation of our coal mining activities which terminated earlier this month. Coal has been the foundation and heart of the Group for many years, but the Group can no longer be defined as a coal mining business and our focus remains firmly orientated towards a range of services to industry and property development. The global move away from fossil fuels has accelerated over the last year and it also became uneconomic to extract the remaining coal reserves. This decision has resulted in an exceptional charge of £4.1m in the period. Additionally, a further £1.4m of losses on legacy civil engineering contracts have been recognised as we close out those accounts.

Net Debt

Net debt was £28.1m (2019: £24.5m including IFRS 16 adjustments). The increase of £3.6m largely relates to the increase in inventory as mining was accelerated as a result of clement operating conditions and mining efficiency. Net debt is likely to remain at a similar level during the first half of this financial year, but bank borrowing is expected to reduce by 31 May 2021 as the coal inventory unwinds. In total however net debt at 31 May 2021 is expected to remain around the same level as the reduction in bank debt will be offset by capital expenditure for the HS2 project, which we anticipate will be leased equipment in the main. A further reduction in net debt is expected by 31 May 2022 as coal inventory continues to fall.

Refinancing

The Group has negotiated a 12 month committed facility of £45m with its existing bankers which is based on the previous facility's asset based lending principles. The facility steps down to £35m by 30 June 2021. This type of facility structure has served the Group well previously but is becoming less appropriate as the Group's business model changes following the cessation of coal mining. The Board intends to negotiate a longer term facility with a more suitable underlying structure over the next few months.

Going concern and Covid-19

The Group has material assets and financial resources at its disposal together with robust risk management and capital allocation processes. The Group's existing bankers have provided a new committed facility as outlined above. A rigorous process of reviewing cash flow forecasts and testing for a range of challenging downside sensitivities has been undertaken including assessing severe yet plausible impacts of Covid-19. Only remedies to these downsides which are entirely within the Group's control have been assumed to be achievable mitigations to those sensitivities. At all times, the Group's banking covenants have remained intact under this stress testing process. Therefore, and after making appropriate enquiries including reviewing budgets and strategic plans, the Directors have a reasonable expectation that the Company and the Group have adequate resources to continue in operational existence for the foreseeable future. Accordingly, the Board continues to adopt the going concern basis in preparing the Annual Report and Accounts.

Dividend

On 26 March 2020, the Board announced the deferral of the interim dividend as a precautionary measure against the potential impact of Covid-19 on the business which at that time was impossible to predict. The Board remains cautious but now believes that it has sufficient forward visibility on both earnings and cashflow to reinstate the payment of a dividend and is recommending an unchanged final dividend of 4.5p per share (2019: 4.5p). If approved at the Annual General Meeting, this will be the only dividend paid in respect of the year ended 31 May 2020. It will be paid on 30 October 2020 to all shareholders on the register at the close of business on 18 September 2020. The shares will become ex-dividend on 17 September 2020.

For the year ending 31 May 2021 and depending on financial performance, the Board intends to return to a conventional dividend payment policy, distributing approximately one third of the anticipated full-year dividend at the interim stage.

Hargreaves Raw Material Services GmbH ("HRMS")

Over the last year there have been two exciting developments within HRMS that have helped to build on the value of the core trading business. Firstly, in December 2019, HRMS acquired 94.9% of DK Recycling und Roheisen GmbH ("DK") for €1. DK's unique recycling process produces high quality pig iron and other products from residual waste materials produced by the steel industry's manufacturing process.

Secondly, HRMS has invested in the construction of a Carbon Pulverisation Plant ("CPP") to provide a low cost and more environmentally friendly energy material to the German heavy industrial base. The CPP is now producing material for its first customer, DK, and will soon be able to provide trial material to other potential customers. Both investments complement the specialist raw materials trading business and create an integrated entity with annual revenue which should exceed €300m in due course.

The impact of Covid-19 on German manufacturing industry has created a challenging environment for both of these business initiatives to flourish and as a result the timescale for their delivery of growth and profitability is currently uncertain. 

Board Changes

I am very pleased that Christopher Jones agreed to join the Board on 1 April 2020. Chris' experience in advising on property development will bring substantial benefits to the Group as we seek to create substantial shareholder value from both our existing land portfolio and new opportunities.

Brexit

The uncertainty as to the final outcome to the Brexit discussions continues. Hargreaves has very little trading activity with any country within the EU. Consequently, the Board expects no material direct impact on the Group's trading activities whatever the final Brexit outcome may be. HRMS trades almost exclusively within the EU but imports much of its trading stock from outside the EU. The Board cannot meaningfully assess any wider macro-economic impact of Brexit which may affect business sentiment in trading and financial markets leading to a material change in the economic or financial environment within the UK and Europe for the Group or its customers.

Strategy

The Board remains focused on delivering reliable and growing profits in and unlocking capital from its Distribution & Services businesses enabling strong cash returns to shareholders alongside investment in the growth of Hargreaves Land. The Board is also supportive of the actions being taken by its German joint venture in creating an integrated specialist manufacturing and minerals trading business in Germany's industrial heartland. The Board believes that this investment has the potential to deliver substantial shareholder value in the next few years.

Shareholder Return

One year ago, I reported that HRMS was not permitted to pay dividends as a condition of its borrowing arrangements for funding the construction of the CPP. Dividends, including the payment of previously undistributed reserves, are expected to recommence in the financial year ending 31 May 2021, with cash being repatriated to the UK in the following financial year. The Board decided that these dividends from HRMS will be passed through to shareholders in the form of an incremental dividend in addition to any normal final dividend which would be declared in the ordinary course in accordance with the dividend policy outlined above. The Board anticipates that this incremental dividend will be in the region of 12p per share. The first such incremental dividend is expected to be declared along with the final dividend for the year ending 31 May 2021 and paid in the following financial year.

Outlook

The past financial year has been another stepping stone as Hargreaves transitions from its traditional coal based business with the key decision taken to cease all coal mining operations. Despite the challenge of Covid-19, the Group has performed resiliently but there is still much to do to realise and deliver shareholder value. I look forward to reporting further progress during the year ending 31 May 2021, as Hargreaves Land re-establishes its momentum following the delays caused by Covid-19, although the Board expects results to be weighted towards the second half of the year.

Roger McDowell

Chairman

28 July 2020

Footnote:

Underlying Profit before Tax is defined by the Board as Profit before Tax prior to exceptional items, amortisation and impairment of intangible assets and includes the Group's share of the post-tax profit of its German joint venture excluding any fair value gains. The Board uses this measure as a Key Indicator in assessing the financial performance of the Group throughout the year and believes that its disclosure benefits readers of the financial statements.
 

Group Business Review

Gordon Banham, Group Chief Executive

Chief Executive's Review

Distribution & Services

The Distribution & Services business recorded revenue of £216.0m (2019: £293.8m). The decrease in revenue was expected as the Specialist Earthworks business unit completed most of its contracts in the previous financial year prior to the forthcoming full mobilisation of the HS2 project. 

Operating profit prior to exceptional items and amortisation was £8.5m (2019: £8.7m). Improvements in operating profit in the Production & Distribution and Industrial Services businesses offset a fall in Specialist Earthworks as a result of much lower levels of activity. On an IFRS basis, this business segment recorded an operating profit of £2.8m (2019: loss of £8.1m).

Exceptional Items

The Group recorded a net £1.7m of exceptional charges in the period (2019: £16.1m exceptional loss) which comprised the following items:

Sale of Drakelands Restoration Limited

On 2 December 2019, the Board announced, the sale of its subsidiary, Drakelands Restoration Limited ("DRL"), to Tungsten West Limited ("TWL") for £2.8m in cash which gave rise to an exceptional gain of £2.4m. Importantly, Hargreaves has also entered into a 10-year Mining Services Contract ("MSC") with TWL to carry out works similar to those previously fulfilled for Wolf. The MSC includes advance payment provisions to protect Hargreaves from credit risk. Should TWL not proceed with its mining plans, Hargreaves will benefit from a restoration programme at the site which is already independently funded.

Despite the adverse impact on the prior year's results, we have now negotiated a strong contractual position to capitalise on any developments at the site without further financial exposure.

Cessation of Coal Mining

In July of this year, Hargreaves ceased to mine coal at its last remaining surface mine at House of Water in Scotland. This decision was made in May 2020 and as a result an exceptional charge of £4.1m, comprising employment related liabilities of £1.4m and accelerated restoration accrual, plant and mining asset depreciation of £2.7m has been recorded.

British Steel Limited

In the results for the year ended 31 May 2019, a total exceptional charge of £8.0m was recorded following the announcement that British Steel Limited was being placed into liquidation. Subsequently, British Steel continued to be operated under the aegis of the Official Receiver and the Group continued to provide services under similar commercial terms as prior to the insolvency. In March 2020, it was announced that the Jingye Group, a Chinese steel business, had acquired the business and Hargreaves is continuing to provide services to British Steel. As a result, £1.4m of the original provision which related to potential employment liabilities has been released as it is no longer required. The balance of the provision has been utilised against plant, work in progress and debtor balances.

Legacy Contracts

The Group has settled one of the remaining legacy civils contracts pertaining to C.A.Blackwell. A loss of £1.4m was incurred. Only two material final accounts remain to be agreed. 

Further information on the performance of each business within Distribution & Services is given below.

Production and Distribution

Revenue was £109.3m (2019: £119.4m), with the reduction primarily due to lower volumes of low margin thermal coal being traded. Operating profit prior to exceptional items and amortisation improved to £4.3m (2019: £3.2m) largely due to improved profitability in the Transport business, which is now focused on waste markets, including clinical waste. Mining operations have been conducted efficiently throughout the last two financial years and as a result the business is carrying higher levels of inventory than is usual. As reported above, mining operations ceased in July 2020. It is expected to take approximately two years to reduce coal inventory levels to around £8m to £10m which represents an appropriate level to support an ongoing coal trading operation providing essential coal to a range of key industries including sugar, brick and cement manufacturers.

Industrial Services

Revenue was flat at £86.4m (2019: £87.4m) with Operating Profit prior to exceptional items up by 13% to £4.3m (2019: £3.8m), a margin of 5.0% (2019: 4.3%).

UK

In the UK, revenue grew by 3% to £59.6m (2019: £57.9m) with Operating Profit prior to exceptional items improving to £3.7m (2019: £2.7m), increasing margins to 6.2% from 4.7%.

The UK business is gradually transitioning away from mainly supporting coal fired power stations and broadening its customer and skills base. The main area of activity is in materials handling but increasingly the business is developing its skills in mechanical and electrical engineering within industrial complexes and is well positioned to secure further work of that nature. The forward order book and term contract positions held by the Industrial Services business provide good visibility of revenue for the next financial year.

International

In the International business, which is primarily based in Hong Kong, revenue reduced to £26.8m (2019: £29.5m) with an Operating Profit of £0.6m (2019: £1.1m), a margin of 2.2% (2019: 3.7%).

The Hong Kong business experienced some slowdown and a modest reduction in activity levels in the final quarter of the year due to Covid-19. Hargreaves' position as a leading vendor to CLP Power Limited remains. We are striving to develop this key and valued relationship by extending the range of services we provide, and we expect this initiative to begin to bear fruit during the year ending 31 May 2021. The South African business, which reported revenue of £1.9m (2019: £2.0m), broke even as it did in 2019, despite a loss of £0.1m in April when operations had to cease entirely for one month due to Covid-19.

Specialist Earthworks

The Specialist Earthworks business recorded revenue of £20.3m (2019: £87.0m) and an Operating Loss prior to exceptional items of £0.1m (2019: profit of £1.8m). The reduction in revenue was expected following the completion of a number of large contracts including the A14 and the delay to the full mobilisation of HS2.

The legacy civils contracts inherited with the acquisition of C.A. Blackwell reported £1.4m (2019: £0.7m) of operating losses in the year, which are recorded as exceptional. These contracts are now completed on site with only minor defects corrections activities remaining. Final accounts remain to be agreed with a total of £11.5m of contract assets, including retentions.

The Specialist Earthworks business is focused on major earthworks projects and has been selected as a strategic partner to the Kier/Eiffage/Bam/Ferrovial joint venture for earthworks on the HS2 rail project. Currently the business is engaged in a Heave Trial on one section of the HS2 line. Contractual discussions are ongoing and full mobilisation for the project is expected to begin in the autumn of this year although the precise timing remains unclear.

The business continues to provide earthmoving consultancy advice on other major planned infrastructure projects in the south of England. The timing of many of these projects is uncertain and subject to political influence, but the business is well placed to provide what is a specialist capability in a market with a small number of potential suppliers.

As a result of the delay to the full mobilisation of the HS2 project, results for the financial year ending 31 May 2021 are not expected to be materially different from those recorded in this financial year and will be weighted to the second half of the year.

Hargreaves Land

Hargreaves Land, the Group's Property business, contributed £6.2m (2019: £2.8m) of revenue and an Operating Loss of £0.2m (2019: profit of £2.2m). Property revenue related to the sale of non-strategic land which releases cash but does not have a constant or recurring profit characteristic.

At the major Blindwells site near Edinburgh, completion of the first sales of fully serviced plots were on schedule to be recorded in May but have been delayed into the year ending 31 May 2021 by Covid-19 as all site works had to be suspended in late March.  Site works recommenced in late June but at a slower pace as a result of Covid-19 safety precautions. £8.0m (2019: £7.0m) of infrastructure cost has been invested in the site during the year, which is included in Inventory in the Group Balance Sheet.

In May 2020, we announced that Hargreaves Land had exchanged the first major commercial contract on Unity, a mixed use development site located at Hatfield, South Yorkshire. Unity is a joint venture with regional developer Waystone Limited and consists of 250 hectares of land of which 60 hectares is allocated for employment and commercial uses with the remainder having planning consent for 3,100 residential properties. The joint venture has exchanged conditional contracts for the sale of a 32 hectare (79 acre) plot to a national retailer for the development of a 75,000 sq. metre (800,000 sq. ft) national distribution centre and training facility.

The sale, which will realise approximately £25m of revenue for the joint venture on legal completion, is conditional upon the grant of planning permission and construction of a new access road which will provide direct access to junction 5 of the M18. Work on the road is expected to commence shortly with legal completion of the sale targeted for the summer of 2021.

Hargreaves Land's strategic goal is that of a property developer rather than acting as a long-term owner of investment properties. It looks to exploit appropriate opportunities whilst restricting the amount of capital to be invested as much as possible. The Board continues to hold the view that the market value of its property portfolio is materially greater than its book value. Where appropriate levels of return can be generated, Hargreaves Land aims to deliver greater development value if that can be extracted through additional investment or by securing enhanced planning conditions.

Central Costs

The Group has achieved a further 16% reduction in Central Costs to £3.7m (2019: £4.4m). Increased insurance costs in a hardening market may result in these costs reverting to previous levels in next financial year.

Hargreaves Raw Material Services GmbH ("HRMS")

The Group's German joint venture, HRMS, contributed £2.1m (2019: £1.5m) to Profit before Tax, including a fair value gain on the acquisition of DK of £0.6m. Otherwise, these results are derived entirely from the HRMS speciality commodity trading business. As noted in the Chairman's Statement above, the Carbon Pulverisation Plant ("CPP") has just started to supply initial quantities of material and made no profit contribution in the financial year.

DK Recycling, which was acquired by HRMS in December for €1, was previously a loss-making business but changes to the cost base and operating procedures have resulted in a break even performance for the period since acquisition. Following an assessment of the fair value of DK at the date of acquisition, a credit of £0.6m has been recorded. DK is separately financed from the rest of HRMS' activities with no recourse to either HRMS or the Group.

New contracts with customers for both the CPP and DK are negotiated on a calendar year basis and as such no material change in financial performance is expected until the 2021 calendar year. Additionally, due to Covid-19, German industrial markets are operating at much lower levels of activity than previously. As a result of these factors, the investments made by HRMS are not expected to have any material impact on the Group's results until the year ending 31 May 2022.

Summary

The Group has traded resiliently through the Covid-19 pandemic and I am both pleased and relieved that our employees and our business have remained safe. Nevertheless, the pandemic has impacted the progress of our Hargreaves Land business and caused a number of smaller delays to other business operations. The delay to the mobilisation for HS2, following the UK Government's approval for the project to proceed, is also frustrating but outside of our control.

The decision to cease coal mining is a landmark event in the history of Hargreaves and demonstrates that the Group is accelerating its transition away from its traditional business roots. Transition and change always create risk and uncertainty alongside opportunity. I would like to thank our employees for their commitment and efforts to help the Group to make that transition and I look forward to them sharing in our future success as we take advantage of the opportunities which lie ahead.

Gordon Banham

Group Chief Executive

28 July 2020

 

Consolidated Statement of Profit and Loss
and Other Comprehensive Income 

For the year ended 31 May 2020

Continuing operations	Note	2020 £000	2019 £000
Revenue	2	222,242	302,613
Cost of sales		(199,385)	(285,902)
Gross profit		22,857	16,711
Other operating income		5,288	4,291
Administrative expenses		(26,840)	(30,690)
Operating profit/(loss)		1,305	(9,688)
Analysed as:
Operating profit (before exceptional items and amortisation)		4,563	6,590
Exceptional items	3	(1,683)	(16,136)
Amortisation and impairment of intangible assets	2	(1,575)	(142)
Operating profit/(loss)		1,305	(9,688)
Finance income		845	450
Finance expenses		(2,134)	(2,154)
Share of profit in joint ventures (net of tax)		2,135	1,534
Profit/(loss) before tax		2,151	(9,858)
Taxation	4	2,119	1,665
Profit/(loss) for the year from continuing operations		4,270	(8,193)
Discontinued operations
Profit for the year from discontinued operations		-	3,526
Profit/(loss) for the year		4,270	(4,667)
Other comprehensive (expense)/income
Items that will not be reclassified to profit or loss
Remeasurements of defined benefit pension schemes		(1,129)	(1,197)
Tax recognised on items that will not be reclassified to profit or loss		283	203
Items that are or may be reclassified subsequently to profit or loss
Foreign exchange translation differences		366	318
Equity adjustment relating to adoption of IFRS 16		(161)	-
Effective portion of changes in fair value of cash flow hedges		83	(1,269)
Tax recognised on items that are or may be reclassified subsequently to profit or loss		(11)	216
Other comprehensive expense for the year, net of tax		(569)	(1,729)
Total comprehensive income/(expense) for the year		3,701	(6,396)

	Note	2020 £000	2019 £000
Profit/(loss) attributable to:
Equity holders of the Company		4,315	(4,741)
Non-controlling interest		(45)	74
Profit/(loss) for the year		4,270	(4,667)
Total comprehensive income/(expense) attributable to:
Equity holders of the Company		3,746	(6,470)
Non-controlling interest		(45)	74
Total comprehensive income/(expense) for the year		3,701	(6,396)
Basic earnings/(loss) per share (pence)	5	13.40	(14.75)
Diluted earnings/(loss) per share (pence)	5	13.11	(14.75)
Basic earnings/(loss) per share from continuing operations (pence)	5	13.40	(25.71)
Diluted earnings/(loss) per share from continuing operations (pence)	5	13.11	(25.71)
Non-GAAP Measures
Basic underlying earnings per share from continuing operations (pence)*	5	19.87	15.30
Diluted underlying earnings per share from continuing operations (pence)*	5	19.44	15.30

*See note 6 for explanation of Alternative Performance Measure Glossary
 

Balance Sheet

at 31 May

			Group
			2020 £000	Restated 2019* £000
Non-current assets
Property, plant and equipment			15,561	45,528
Right of use assets**			15,845	-
Investment property			9,216	10,067
Intangible assets including goodwill			9,418	10,983
Investments in associates and joint ventures			14,093	11,744
Deferred tax assets			8,332	6,229
			72,465	84,551
Current assets
Other financial assets			65	25
Inventories			64,009	48,040
Trade and other receivables			71,316	75,562
Income tax asset			8	-
Contract assets*			11,456	19,545
Cash and cash equivalents			18,499	21,583
			165,353	164,755
Total assets			237,818	249,306
Non-current liabilities
Other interest-bearing loans and borrowings***			(9,437)	(35,222)
Retirement benefit obligations			(3,768)	(4,184)
Provisions			(1,679)	(4,757)
Other financial liabilities			-	(137)
			(14,884)	(44,300)
Current liabilities
Other interest-bearing loans and borrowings***			(37,186)	(4,289)
Trade and other payables*			(43,362)	(65,995)
Provisions*			(12,088)	(6,501)
Income tax liability			-	(594)
Other financial liabilities			(243)	(150)
			(92,879)	(77,529)
Total liabilities			(107,763)	(121,829)
Net assets			130,055	127,477
			Group
			2020 £000	2019* £000
Equity attributable to equity holders of the parent
Share capital			3,314	3,314
Share premium			73,955	73,955
Other reserves			211	211
Translation reserve			(326)	(692)
Merger reserve			1,022	1,022
Hedging reserve			174	102
Capital redemption reserve			1,530	1,530
Share based payment reserve			1,462	1,139
Retained earnings			48,703	46,841
			130,045	127,422
Non-controlling interest			10	55
Total equity			130,055	127,477

*The comparative balance sheet has been restated to increase provisions by £5.2m,  decrease trade and other payables by £3.3m and decrease contract assets by £1.9m.

**The Group has adopted IFRS 16 starting 1 June 2019 using the modified retrospective transition option. Under this option, the comparative information is not restated. See Note 1.

***Interest-bearing loans and borrowings at 31 May 2020 include £1.4m of additional current liabilities and £6.2m of additional non-current lease liabilities recognised under IFRS 16.

 

Consolidated Statement of Changes in Equity

Group	Share capital £000	Share premium £000	Translation reserve £000	Hedging reserve £000	Other reserves £000	Capital redemption reserve £000	Merger reserve £000	Share- based payment reserve £000	Retained earnings £000	Total Parent equity  000	Non- controlling interest £000	Total equity £000
At 1 June 2018	3,314	73,955	(1,010)	1,155	211	1,530	1,022	1,043	54,886	136,106	(19)	136,087
Total comprehensive (expense)/income for the year
(Loss)/profit for the year	-	-	-	-	-	-	-	-	(4,741)	(4,741)	74	(4,667)
Other comprehensive income/(expense)
Foreign exchange translation differences	-	-	318	-	-	-	-	-	-	318	-	318
Effective portion of changes in fair value of cash flow hedges	-	-	-	(1,269)	-	-	-	-	-	(1,269)	-	(1,269)
Remeasurements of defined benefit pension schemes	-	-	-	-	-	-	-	-	(1,197)	(1,197)	-	(1,197)
Tax recognised on other comprehensive income	-	-	-	216	-	-	-	-	203	419	-	419
Total other comprehensive income/(expense)	-	-	318	(1,053)	-	-	-	-	(994)	(1,729)	-	(1,729)
Total comprehensive income/(expense) for the year	-	-	318	(1,053)	-	-	-	-	(5,735)	(6,470)	74	(6,396)
Transactions with owners recorded directly in equity
Equity-settled share-based payment transactions	-	-	-	-	-	-	-	96	-	96	-	96
Dividends paid	-	-	-	-	-	-	-	-	(2,310)	(2,310)	-	(2,310)
Total contributions by and distributions to owners	-	-	-	-	-	-	-	96	(2,310)	(2,214)	-	(2,214)
At 31 May 2019	3,314	73,955	(692)	102	211	1,530	1,022	1,139	46,841	127,422	55	127,477

Group	Share capital £000	Share premium £000	Translation reserve £000	Hedging reserve £ 000	Other reserves £000	Capital redemption reserve  000	Merger reserve £000	Share- based payment reserve £000	Retained earnings £000	Total Parent equity £000	Non- controlling interest  000	Total equity* £000
At 1 June 2019	3,314	73,955	(692)	102	211	1,530	1,022	1,139	46,841	127,422	55	127,477
Total comprehensive income/(expense) for the year
Profit/(loss) for the year	-	-	-	-	-	-	-	-	4,315	4,315	(45)	4,270
Other comprehensive income/(expense)
Foreign exchange translation differences	-	-	366	-	-	-	-	-	-	366	-	366
Effective portion of changes in fair value of cash flow hedges	-	-	-	83	-	-	-	-	-	83	-	83
Equity adjustment relating to adoption of IFRS 16*	-	-	-	-	-	-	-	-	(161)	(161)	-	(161)
Remeasurements of defined benefit pension schemes	-	-	-	-	-	-	-	-	(1,129)	(1,129)	-	(1,129)
Tax recognised on other comprehensive income	-	-	-	(11)	-	-	-	-	283	272	-	272
Total other comprehensive income/(expense)	-	-	366	72	-	-	-	-	(1,007)	(569)	-	(569)
Total comprehensive income/(expense) for the year	-	-	366	72	-	-	-	-	3,308	3,746	(45)	3,701
Transactions with owners recorded directly in equity
Equity-settled share-based payment transactions	-	-	-	-	-	-	-	323	-	323	-	323
Dividends paid	-	-	-	-	-	-	-	-	(1,446)	(1,446)	-	(1,446)
Total contributions by and distributions to owners	-	-	-	-	-	-	-	323	(1,446)	(1,123)	-	(1,123)
At 31 May 2020	3,314	73,955	(326)	174	211	1,530	1,022	1,462	48,703	130,045	10	130,055

*The Group has adopted IFRS 16 starting 1 June 2019 using the modified retrospective transition option which has resulted in an impact of £161,000 on the Group's opening equity. Under this option, the comparative information is not restated. See Note 1.

 

Cash Flow Statements 

for year ended 31 May 2020

		Group
		2020 £000	Restated 2019* £000
Cash flows from operating activities
Profit/(loss) for the year from continuing operations		4,270	(8,193)
Adjustments for:
Depreciation and impairment of property, plant and equipment and right-of-use assets****		19,305	16,136
Amortisation and impairment of goodwill and intangible assets		1,575	142
Net finance expense		1,289	1,704
Share of profit in joint ventures (net of tax)		(2,135)	(1,534)
Profit on sale of property, plant and equipment, investment property and right-of-use assets		(2,851)	(4,291)
Equity settled share-based payment expenses		323	96
Income tax (credit)/expense		(2,119)	(1,665)
Contributions to defined benefit pension schemes		(1,858)	(1,746)
Translation of non-controlling interest and investments		-	(100)
		17,799***	549
Change in assets held for sale		-	8,961
Change in inventories		(15,969)	(11,262)
Change in trade and other receivables		12,611	24,223*
Change in trade and other payables		(22,863)	(20,719)*
Change in provisions and employee benefits		2,740	7,031*
		(5,682)	8,783
Net interest paid		(1,104)	(1,635)
Income tax (paid)/received		(272)	307
Net cash (outflow)/inflow from continuing operating activities		(7,058)	7,455
Net cash inflow from operating activities in discontinued operations		-	15,593
Net cash (outflow)/inflow from operating activities		(7,058)	23,048
Cash flows from investing activities
Proceeds from sale of property, plant and equipment and investment property		12,172	12,231
Acquisition of property, plant and equipment and investment property		(3,052)	(8,433)
Net cash inflow from investing activities		9,120	3,798
Cash flows from financing activities
Principal elements of lease payments (2019 Payment of finance lease liabilities)**		(8,769)	(6,780)
Dividends paid		(1,446)	(2,310)
Proceeds from/(repayment of) Group banking facilities		5,000	(12,300)
Net cash (outflow)/inflow from financing activities		(5,215)	(21,390)
Net (decrease)/increase in cash and cash equivalents		(3,153)	5,456
Cash and cash equivalents at 1 June		21,583	16,110
Effect of exchange rate fluctuations on cash held		69	17
Cash and cash equivalents at 31 May		18,499	21,583

*The comparative Group cash flow statement has been restated to decrease change in trade and other receivables by £1.9m, increase change in trade and other payables by £3.3m and increase change in provisions and employee benefits by £5.2m.

**The Group has adopted IFRS 16 starting 1 June 2019 using the modified retrospective transition option. Under this option, the comparative information is not restated. See Note 1.

***Operating cash inflows before movements in working capital for the year ended 31 May 2020 are £4,058,000 higher due to the adoption of IFRS 16. Interest paid for the year ended 31 May 2020 is £280,000 higher due to the adoption of IFRS 16. Cash outflows in respect of the capital element of lease rental payments for the year ended 31 May 2020 are £2,895,000 higher due to the adoption of IFRS 16.

****Additional depreciation on the Group's right-of-use assets due to the adoption of IFRS 16 amounted to £4,173,000 for the year ended 31 May 2020.

 

1  Basis of preparation and status of financial information

The financial information set out above has been prepared in accordance with the recognition and measurement criteria of International Financial Reporting Standards as adopted by the EU ("Adopted IFRSs") using interpretations issued by the IFRS Interpretations Committee and in line with the Companies Act 2006 as applicable to companies using IFRS.

The financial information set out above does not constitute the Group's statutory accounts for the years ended 31 May 2020 or 31 May 2019. Statutory accounts for 2019 have been delivered to the Registrar of Companies, and those for 2020 will be delivered in due course. The auditor has reported on those accounts; their reports were (i) unqualified, (ii) did not include a reference to any matters to which the auditor drew attention by way of emphasis without qualifying their report and (iii) did not contain a statement under section 498 (2) or (3) of the Companies Act 2006.

The accounting policies set out below have, unless otherwise stated, been applied consistently to all periods presented in these consolidated financial statements. The Group has restated the May 2019 balance sheet in relation to the reclassification of certain provision balances from accruals and contract assets to provisions. A third balance sheet has not been presented as the impact of the restatement is not considered to be qualitatively material to users of the accounts.

The Group has adopted IFRS 16 using the modified retrospective approach under which the cumulative effect of adoption is recognised through reserves, with comparatives continuing to be reported under IAS 17.

Going concern and Covid-19

The Group has material assets and financial resources at its disposal together with robust risk management and capital allocation processes. The Group's existing bankers have provided an initial £45m committed facility until 31 July 2021. The facility steps down at certain points over the year to £35m. A rigorous process of reviewing cash flow forecasts and testing for a range of challenging downside sensitivities has been undertaken including assessing severe yet plausible impacts of Covid-19. Only remedies to these downsides which are entirely within the Group's control have been assumed to be achievable mitigations to those sensitivities. At all times, the Group's banking covenants have remained intact under this stress testing process.

The structure of this facility, which is based on similar asset based lending principles as its predecessor, is not considered to be appropriate in the long term as the Group's business model develops away from coal production to a Group which focusses more on trading, services and property development. During the next few months, we will be working with lenders to put a longer term facility in place which will fit better with Hargreaves' evolving business model. The Board is confident that suitable new facilities will be secured to replace the new facility before it expires. Therefore, and after making appropriate enquiries including reviewing budgets and strategic plans, the Directors have a reasonable expectation that the Company and the Group have adequate resources to continue in operational existence for the foreseeable future. Accordingly, the Board continues to adopt the going concern basis in preparing the Annual Report and Accounts.

These results were approved by the Board of Directors on 28 July 2020.

2  Segmental Information

The following analysis by industry segment is presented in accordance with IFRS 8 on the basis of those segments whose operating results are regularly reviewed by the Board of Directors (the Chief Operating Decision Maker as defined by IFRS 8) to assess performance and make strategic decisions about allocation of resources.

The sectors distinguished as operating segments are Distribution & Services, Hargreaves Land, Unallocated and HSEL.

• Distribution & Services: Provides coal distribution, including mining operations, materials handling and contracting services and logistics to a range of industrial, wholesale and public sector customers. The business unit also provides earth moving and infrastructure services across the UK and trades in plant and machinery.

• Hargreaves Land: The development and realisation of value from the land portfolio including rental income from investment properties.

• Unallocated: The corporate overhead contains the central functions that are not devolved to the individual business units.

• Hargreaves Services Europe ("HSEL"): The Group's share of its German joint venture.

These segments are combinations of subsidiaries and joint ventures. They have separate management teams and provide different products and services. The four operating segments are also reportable segments.

The segment results, as reported to the Board of Directors, are calculated under the principles of IFRS. Performance is measured on the basis of underlying profit/(loss) before tax, which is reconciled to profit/(loss) before tax in the tables below:

	Distribution & Services 2020 £000	Hargreaves  Land 2020 £000	Unallocated 2020 £000	HSEL 2020 £000	Total 2020 £000
Revenue
Total revenue	216,283	6,217	-	-	222,500
Intra-segment revenue	(258)	-	-	-	(258)
Revenue from external customers	216,025	6,217	-	-	222,242
Operating profit/(loss) (before exceptional items and amortisation)	8,496	(194)	(3,739)	-	4,563
Share of profit in joint ventures (net of tax)*	-	-	-	2,135	2,135
Net financing costs	(1,641)	(115)	467	-	(1,289)
Amortisation and impairment of intangibles	(1,575)	-	-	-	(1,575)
Exceptional items	(4,120)	-	2,437	-	(1,683)
Profit/(loss) before taxation	1,160	(309)	(835)	2,135	2,151
Taxation	603	979	537	-	2,119
Profit/(loss) after taxation	1,763	670	(298)	2,135	4,270
Depreciation charge	(18,666)	(116)	(523)	-	(19,305)
Capital expenditure	(2,578)	(94)	(129)	-	(2,801)
Net assets/(liabilities)
Segment assets	161,859	58,635	3,231	-	223,725
Segment liabilities	(65,172)	(2,423)	(40,168)	-	(107,763)
Segment net assets/(liabilities)	96,687	56,212	(36,937)	-	115,962
Joint ventures	-	-	-	14,093	14,093
Total net assets/(liabilities)	96,687	56,212	(36,937)	14,093	130,055

*Share of profit in joint ventures includes £0.6m of fair value gain on an acquisition by a joint venture.

Unallocated net liabilities of £36.9m include the Group banking facilities liability (£32.0m), cash and cash equivalents (£6.3m liability), derivative financial instruments (£0.2m liability), VAT liability (£1.9m) and deferred tax asset (£8.3m), retirement benefit obligations (£3.8m) and other corporate items (£1.0m liability).

	Restated Distribution & Services 2019 £000	Hargreaves Land 2019 £000	Unallocated 2019 £000	HSEL 2019 £000	Total 2019 £000
Revenue
Total revenue	293,787	3,634	6,054	-	303,475
Intra-segment revenue	-	(862)	-	-	(862)
Revenue from external customers	293,787	2,772	6,054	-	302,613
Operating profit/(loss) (before exceptional items and amortisation)	8,734	2,232	(4,376)	-	6,590
Share of profit in joint ventures (net of tax)	-	-	-	1,534	1,534
Net financing costs	(1,646)	(144)	86	-	(1,704)
Amortisation and impairment of intangibles	(142)	-	-	-	(142)
Exceptional items	(16,770)	-	634	-	(16,136)
(Loss)/profit before taxation	(9,824)	2,088	(3,656)	1,534	(9,858)
Taxation	1,436	(305)	534	-	1,665
(Loss)/profit after taxation	(8,388)	1,783	(3,122)	1,534	(8,193)
Depreciation charge	(15,416)	(192)	(528)	-	(16,136)
Capital expenditure	(15,535)	(15)	(365)	-	(15,915)
Net assets/(liabilities)
Segment assets	190,148	27,288	20,126	-	237,562
Segment liabilities	(85,624)	(2,970)	(33,235)	-	(121,829)
Segment net assets/(liabilities)	104,524	24,318	(13,109)	-	115,733
Joint ventures	-	-	-	11,744	11,744
Total net assets/(liabilities)	104,524	24,318	(13,109)	11,744	127,477

Unallocated net liabilities of £13.1m include the Group banking facilities liability (£26.9m), cash and cash equivalents (£0.9m liability), derivative financial instruments (£0.3m liability), corporation tax liability (£0.6m) and deferred tax asset (£6.2m), retirement benefit obligations (£4.2m), and other assets of £13.6m.

3  Exceptional Items

The Group incurred a number of exceptional items in the year as follows:

	2020 £000	2019 £000
Exceptional items in Revenue
Reduction in value of legacy contracts in C.A. Blackwell (Contracts) Limited	(933)	-
Total exceptional items in Revenue	(933)	-
Exceptional items in Cost of Sales
Losses on legacy contracts in C.A. Blackwell (Contracts) Limited	(487)	(676)
Cessation of coal mining activities	(4,108)	-
Movement in provision in respect of the insolvency of British Steel	1,408	(3,839)
Losses due to insolvency of Wolf Minerals (UK) Limited	-	(8,130)
Total exceptional items in Cost of Sales	(3,187)	(12,645)
Exceptional items in Other Operating income
Gain on disposal of Drakelands Restoration Limited	2,437	-
Total exceptional items in Other Operating income	2,437	-
Exceptional items in Administrative expenses
Losses due to insolvency of British Steel	-	(4,125)
Net amounts recovered from C.A. Blackwell (Contracts) Limited breach of warranty claim	-	634
Total exceptional items in Administrative expenses	-	(3,491)
Total	(1,683)	(16,136)

Following the decision to cease all coal mining operations the Group incurred an exceptional charge of £4,108,000, reflecting employment related liabilities of £1,421,000, associated asset write downs of £1,746,000 and restoration liabilities of £941,000.

On 2 December 2019 the Group disposed of its shareholding in Drakelands Restoration Limited ("DRL") for proceeds of £2,800,000, the total assets and net assets of DRL at date of disposal were nil and directly attributable costs totalled £363,000 resulting in a profit on disposal of £2,437,000, reported within the unallocated reportable segment.

Following the insolvency of British Steel, a cost of £7,964,000 was recognised in the year ended 31 May 2019 with £1,681,000 relating to employment liabilities and the remainder relating to debtor, WIP and associated plant impairments. Following the acquisition of British Steel in the year ended 31 May 2020 there is no longer any need for the remaining employment related provision, and it has been released reversing the exceptional charge from the prior year.

Further losses have been recognised on the legacy contracts within C.A. Blackwell (Contracts) Limited resulting in a reversal of previously recognised revenue of £933,000 and further costs of £487,000.

4  Taxation

Recognised in the Income Statement

	2020 £000	2019 £000
Current tax
Current year	89	87
Adjustments for prior years	(377)	344
Current tax (credit)/expense	(288)	431
Deferred tax
Origination and reversal of temporary timing differences	(381)	(1,178)
Reduction in tax rate	(885)	-
Adjustments for prior years	(565)	(918)
Deferred tax credit	(1,831)	(2,096)
Tax credit in Income Statement (excluding share of tax of equity accounted investees)	(2,119)	(1,665)

The deferred tax adjustment in respect of prior years of £565,000 relates to capital allowances, which were disclaimed within the Group provision previously.

Recognised in Other Comprehensive Income

	2020 £000	2019 £000
Deferred tax (expense)/income
Effective portion of changes in fair value of cash flow hedges	(11)	216
Remeasurements of defined benefit pension schemes	283	203
	272	419

Reconciliation of Effective Tax Rate

	2020 £000	2019 £000
Profit/(loss) for the year from continuing operations	4,270	(8,193)
Total tax credit	(2,119)	(1,665)
Profit/(loss) excluding taxation from continuing operations	2,151	(9,858)
Tax using the UK corporation tax rate of 19.00% (2019: 19.00%)	409	(1,873)
Effect of tax rates in foreign jurisdictions	(13)	(39)
Tax effect of joint ventures	(405)	(292)
(Previously unrecognised)/unrecognised tax losses	(678)	576
Non-deductible expenses	395	537
Impact of change in tax rates	(885)	-
Adjustment in respect of previous periods	(942)	(574)
Effective total tax credit	(2,119)	(1,665)

The UK corporation tax rate has been 19.00% for the duration of the financial year (2019: 19.00%).

Factors That May Affect Future Current and Total Tax Charges

The rate of tax for the current and prior year was 19%. On 16 March 2016 it was announced that the main rate of UK Corporation Tax would reduce to 17% on 1 April 2020. This change was substantively enacted on 6 September 2016.  Following the March 2020 budget, the corporate tax rate will now remain at 19% and will not reduce to 17% in April 2020 as previously announced. The deferred tax balances at 31 May 2020 and 31 May 2019 have been calculated based on the rate substantively enacted at the balance sheet date of 19% (2019: 17%).

5  Earnings per Share

The calculation of earnings per share ("EPS") is based on the profit for the year attributable to equity holders and on the weighted average number of shares in issue and ranking for dividend in the year.

	2020			2019
	Earnings £000	EPS Pence	DEPS Pence	Earnings £000	EPS Pence	DEPS Pence
Underlying earnings per share from continuing operations	6,399	19.87	19.44	4,918	15.30	15.30
Exceptional items, fair value adjustments and amortisation (net of tax)	(2,084)	(6.47)	(6.33)	(13,185)	(41.01)	(41.01)
Continuing basic earnings/(loss) per share	4,315	13.40	13.11	(8,267)	(25.71)	(25.71)
Discontinued operations	-	-	-	3,526	10.96	10.96
Basic earnings/(loss) per share	4,315	13.40	13.11	(4,741)	(14.75)	(14.75)
Weighted average number of shares		32,199	32,913		32,150	32,150

The calculation of weighted average number of shares includes the effect of own shares held of 856,410 (2019: 1,013,502).

The calculation of diluted earnings/(loss) per share is based on the profit/(loss) for the year and the weighted average number of ordinary shares in issue in the year the potentially dilutive effect of the share options outstanding (effect on weighted average number of shares) is 714,075 (2019: 425,491); effect of basic earnings/(loss) per ordinary share in the current year is 0.29p (2019: 0.00p). Effect on continuing basic earnings/(loss) per ordinary share is 0.29p (2019: 0.00p). In relation to the discontinued operations in 2019 there was no impact on the diluted EPS.

6   Alternative Performance Measures Glossary

This report provides alternative performance measures ("APMs"), which are not defined or specified under the requirements of International Financial Reporting Standards. The Board believes that these APMs provide readers with important additional information on the business.

Alternative Performance Measure	Definition and Purpose
Underlying profit before tax	Represents the profit before tax prior to exceptional items, fair value adjustments, amortisation and impairment of intangible assets and, in accordance with International Accounting Standards, includes the Group's share of the post-tax profit of its German joint venture. This measure is consistent with how the business measures performance and is reported to the Board. 2020 2019 £'000 £'000 Profit before tax 2,151 (9,858) Exceptional items (see Note 3) 1,683 16,136 Amortisation and impairment of intangible assets and goodwill 1,575 142 Fair value gain on acquisition by a joint venture (555) - Underlying Profit before Tax 4,854 6,420
Underlying Operating Profit	Represents operating profit prior to exceptional items, amortisation and impairment of intangible assets and fair value gains on acquisition. 2020 2019 £'000 £'000 Operating profit 1,305 (9,688) Exceptional items (see Note 3) 1,683 16,136 Amortisation and impairment of intangible assets and goodwill 1,575 142 Underlying Operating Profit 4,563 6,590
Underlying Operating Margin	Represents the calculation of Underlying Operating Profit divided by Revenue 2020 2019 Distribution and Services £'000 £'000 Underlying operating profit (see Note 2) 8,496 8,734 Revenue 216,025 293,787 3.9% 3.0%
Basic underlying earnings per share	Profit attributable to the equity holders of the Company prior to exceptional items, the amortisation and impairment of intangible assets and fair value gains on acquisition after tax divided by the weighted average number of ordinary shares during the financial year adjusted for the effects of any potentially dilutive options. See Note 5.
Net Debt	Represents the net position of the Group's cash and loan balances including leases. Calculated as follows:
		2020 £'000	2019 £'000
	Cash and cash equivalents	18,499	21,583
	Non-current interest bearing loans and borrowings	(9,437)	(35,222)
	Current interest bearings loans and borrowings	(37,186)	(4,289)
	Net Debt (2019 pre IFRS 16 adjustment)	(28,124)	(17,928)
	IFRS 16 lease liability adjustment	-	(6,608)
	Net Debt (2019 post IFRS 16 adjustment)	(28,124)	(24,536)
Net Asset Value per share	Represents the Net Asset value of the Group divided by the number of shares in issue less those shares held in treasury. Calculated as follows:
		2020 £'000	2019 £'000
	Total shares in issue	33,138,756	33,138,756
	Less shares in treasury	(856,410)	(1,013,502)
	Shares for calculation	32,282,346	32,125,254
	Net Asset Value per Balance Sheet	£130,055,000	£127,477,000
	Net Asset Value per share	£4.03	£3.97

7   Posting of Report & Accounts

The Group confirms that the annual report and accounts for the year ended 31 May 2020 will be posted to shareholders as soon as practicable and a copy will be made available on the Group's website:

www.hsgplc.co.uk

 

END

 

 

FR RPMMTMTATTAM