HARGREAVES SERVICES PLC

(the "Group", the "Company" or "Hargreaves")

Interim Results for the six months ended 30 November 2021

Hargreaves Services plc (AIM: HSP), a diversified group delivering key projects and services to the industrial and property sectors, announces its interim results for the six months ended 30 November 2021.

HIGHLIGHTS

·      Revenue reduced as expected following exit from coal business in December 2020; 

·      Profits increased in all three business segments;

·      Profit after tax from German joint venture £9.0m (2020: £0.9m);

·      Board expectations increased materially for current and future years;

·      Interim dividend increased by 3.7% to 2.8p (2020: 2.7p);

·      Net debt reduced to £3.0m (2020: £20.8m).

Commenting on the interim results, Chairman Roger McDowell said: "The Group has delivered a strong set of results and carries real momentum into the second half of the financial year in all segments of the business. The German joint venture continues to deliver substantial profits and our balance sheet is strong with no bank debt. The Board has increased its expectations for financial performance in the current and future years materially and I look forward to reporting further progress in due course."

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About Hargreaves Services plc (www.hsgplc.co.uk)

Hargreaves Services plc is a diversified group delivering services to the industrial and property sectors, supporting key industries within the UK and South East Asia. The Company's three business segments are Services, Hargreaves Land and an investment in a German joint venture, Hargreaves Raw Materials Services GmbH ("HRMS"). Services provides critical support to many core industries including Energy, Environmental, UK Infrastructure and certain manufacturing industries through the provision of materials handling, mechanical and electrical contracting services, logistics and major earthworks. Hargreaves Land is focused on the sustainable development of brownfield sites for both residential and commercial purposes. HRMS trades in specialist commodity markets and owns DK Recycling, a specialist recycler of steel waste material. Hargreaves is headquartered in County Durham and has operational centres across the UK, as well as in Hong Kong and a joint venture in Duisburg, Germany.

CHAIRMAN'S STATEMENT

Introduction

I am pleased to be able to report another strong set of results for the Group. Each of the three pillars of the business, being Services, Hargreaves Land and our investment in Germany, now have real momentum behind them and the Group has seen year on year growth in profitability across each business segment.

The last six months have continued to be challenging for many, as the world continues to deal with the impact of the Coronavirus pandemic. Throughout this time, I have been particularly impressed with the dedication and professionalism of our employees and I would like to thank them once again for their support.

Momentum

The first half of this financial year has been a period of demonstrable momentum in each of our businesses. Whilst, the Group's German Joint Venture, Hargreaves Raw Materials Services GmbH ("HRMS") has continued to capitalise on favourable market conditions, it has also delivered sustainable operational improvements within DK Recycling.

The Services business has started work in earnest on HS2, with monthly revenues now over £2m from that contract. The announcement of the successful listing of Tungsten West plc ("TW") has provided further impetus to the business which has a 10 year mining services contract with TW in addition to the right to eight annual payments of £1m, the first of which has been received.

Hargreaves Land has made substantial progress on both the commercial and residential aspects of the Unity Joint Venture. More details are set out below in the Chief Executive's Review. This is in addition to the news that Brockwell Energy Limited, a former subsidiary of the Group, has obtained financial close on an Energy from Waste plant which is to be constructed at our Westfield site. This represents the start of the development of the Group's renewable energy land assets.

Results

As expected, Group Revenue reduced to £76.1m (2020: £92.0m) following the decision to end all material coal related activities in December 2020. The Group's Profit before tax has increased substantially to £10.4m (2020: £1.1m). While the majority of the improvement in profit is attributable to the continued strong performance of HRMS, I note that both the Services and Land businesses have contributed a combined £1.3m of this growth. Basic earnings per share have increased over ninefold to 31.0p (2020: 3.4p). Further information on trading is given in the Chief Executive's Review.

Cash and debt

The Group held net cash of £8.5m on 30 November 2021, compared to a net bank debt position of £8.0m twelve months ago. This improvement was largely due to the decision to exit coal in December 2020, which released a substantial amount of cash from working capital.

The Group has loaned £15m to HRMS in the period to support the German management team to capitalise on strong trading conditions in their specialist markets. This loan will be repaid in the second half of the year.

Total net debt, which includes leasing debt of £11.5m (2020: £12.8m), was £3.0m compared with £20.8m on 30 November 2020. The Board is anticipating net debt (including leasing debt) to be higher at the year end due to the anticipated investment in leased equipment for the HS2 contract, but the quantum is dependent on the timing of delivery. The Group does not expect to have any net bank debt at the year end.

Dividend

The Group's performance has enabled the Board to increase the interim dividend by 3.7% to 2.8p (2020: 2.7p). The interim dividend will be paid on 6 April 2022 to shareholders on the register at 25 February 2022. Subject to HRMS maintaining the requirements of its borrowing arrangements, the Board intends to continue to pass through an additional 12p per share dividend from HRMS to Hargreaves' shareholders annually for the next few years as previously undistributed profits in HRMS are repatriated to the Company. Such additional dividend would be declared and paid alongside any final ordinary dividend following shareholder approval at the 2022 Annual General Meeting.

COVID-19

The Group has traded resiliently throughout the pandemic. The Board does not consider the pandemic to be a material threat to its operations at the present time.

Strategy and Shareholder Value

The Group has developed three strong, defined pillars through which to create, deliver and realise value for shareholders.

Services

The Services business is building a sustainable profit stream through stable term contracts and framework agreements in the Energy, Environmental, Infrastructure and Industrial sectors. The Group currently has over 50 such contracts in place to support the reliability of future performance. The business is concentrated on organic, capital-light growth, with a particular focus on contract selectivity and higher margin activities.

Hargreaves Land

This business is focused on maximising the inherent value of its existing portfolio, including Blindwells and Unity, as well as developing a strong pipeline of new opportunities. In addition, the business is now starting to deliver value from its renewable energy land portfolio.

HRMS

This business is continuing to take advantage of strong trading conditions leading to a material increase in the Board's expectations for profits in the current and future years. It is now focused on sustaining an increased level of profitability in DK Recycling following its acquisition in December 2019 and securing contracts to increase the utilisation of its Carbon Pulverisation Plant.

In July 2021, I stated: "the Board believes that its investment in the HRMS joint venture has the potential to deliver substantial shareholder value in the next few years. The Board considers it likely that HRMS would benefit in due course from being part of a larger, more specialised business and it plans to explore strategic options for HRMS with its professional advisors over the course of the next several months." Following such discussions and after consultation with the German management team, the Board has decided to continue to support the development of HRMS. The Board believes that the inherent value of HRMS can be most effectively demonstrated by trading successfully through commodity cycles. Over the medium term the Board considers that HRMS will be a material profit and cash generator for the Group and that it has further value opportunities to exploit.

Outlook

The first six months of the year have been positive for the Group and have built on the back of the strong year ended 31 May 2021. The Group has now moved on from its historic activities and has a clear strategy to create, deliver and realise shareholder value in each of its businesses. The Group has real momentum behind each of its businesses, and the progress made in HRMS has encouraged the Board to increase its expectations materially for the current and future years. I look forward to reporting further progress in the second half of the year.

Roger McDowell

Chairman

26 January 2022

CHIEF EXECUTIVE'S REVIEW

Services

The Services business recorded revenue of £70.2m (2020: £89.9m) and Profit before tax of £3.1m (2020: £2.0m).The reduction in revenue is due to the cessation of all material coal related activities in December 2020. Growth in Profit before tax is due, in part, to the performance of the Specialist Earthworks business which has seen a contribution from the HS2 contract in the first half compared to minimal activity in the comparative period.

Services has continued to make good progress throughout the first half. It is focused on delivering services to four key market sectors, being Energy, Environmental, Industrial and Infrastructure. In addition to the solid trading performance delivered in the first half, there are two particular factors that I would like to highlight.

Hemerdon

As announced in October 2021, the Board was pleased to note the successful listing of Tungsten West plc ("TW") on AIM. TW are the owners of the large tungsten mine at Hemerdon in Devon and the funds raised by the listing will help to secure the future of the site. This news was important for Hargreaves, because we have an exclusive 10-year mining services contract with TW, which is now expected to commence operations in 2023. As part of this, the Group is entitled to eight annual payments of £1m, the first of which was received in November 2021.

This contract provides a long term and sustainable revenue stream for the Services business in an operation that plays to our key strengths. Credit risk has been mitigated through the agreed contract terms.

HS2

The Group was appointed by the EKFB Joint Venture to carry out the major earthworks on a part of the HS2 project in March 2021 under a £120m contract, however work did not begin in earnest until the current financial year. I am pleased to report that we now have over 100 employees on the project and the monthly run rate for revenue is over £2m. We anticipate the level of activity to grow from the spring of 2022 as the weather improves and we enter the normal earthmoving season.

The Services business continues to be heavily weighted to the second half of the financial year, in terms of both revenue and profit. This is partly due to the recurring annual profile of our operations in Hong Kong, in which major outages generally occur in the second half. In the current year, the weighting of results is also impacted by the timing of works on the HS2 contract.

The UK has seen higher levels of inflation in recent times and with the possibility of further increases this is an area of risk for many businesses. Hargreaves is well insulated against inflation, with many of the term contracts in the Services business having specific escalation clauses to mitigate any increase in underlying delivery costs.

Looking to the medium term, we are growing our environmental offering as we look at the potential for carbon sequestration on former surface mining sites in Scotland as well as continuing to develop the mechanical and electrical engineering business, which provides for better margins and which complements our existing materials handling operations.

There are many reasons to be optimistic about the outlook for the Services business both in the second half of the year and in the medium to long term.

Hargreaves Land

Hargreaves Land recorded revenue of £5.8m (2020: £2.1m) and a Profit before tax of £0.5m (2020: loss of £0.1m) for the period.

Subsequent to the period end, I am pleased to report that completion has been achieved on the 12.9 acre sale at Blindwells to Persimmon for a total consideration of £9.6m payable in three equal annual instalments. This highlights the progress being made on this flagship residential development. To date Hargreaves Land has achieved total completed sales of £18.6m over 26.6 acres. There are a further eight parcels of land remaining to be sold over the next ten years within phase one of the Blindwells project. Phase two represents an additional 110 acres which is currently being promoted through the local plan for a further 1,500 homes, with planning allocated expected in 2027. This provides a solid and reliable base for recurring revenue and profits from Blindwells.

Progress has also been made at the 650 acre Unity Joint Venture. The project has exchanged contracts with Bellway and Harron Homes for the conditional sale of 36 acres of residential land, which will generate an expected revenue for the Joint Venture of £15m, with completion expected in stages commencing in the financial year ending 31 May 2024. In addition to the residential exchange, following the 79 acre sale for the development of a £25m logistics hub announced in April 21, the Joint Venture has secured a £14m enabling works contract to facilitate that development.

This progress provides clear visibility of future cashflows for the Unity Joint Venture. The scheme, which is independently funded, is a long term project and is expected to deliver substantial value to the Group over at least the next 10 years.

In December 2021, the Group noted the successful financial close that was achieved on the Westfield Energy from Waste ("EfW") plant being developed by our former subsidiary Brockwell Energy Limited ("Brockwell"). The immediate impact was the receipt of £2m of deferred consideration from the sale of Brockwell. Additionally, Brockwell has entered into a minimum 35 year index linked lease starting at £105k per annum and growing to £420k per annum following the construction of the plant, but this higher rent will commence no later than 2025.

This also marks the first major step in the delivery of value within the Group's portfolio of renewable energy land assets. There are approximately 100 developable acres at Westfield, and the EfW plant will only occupy 9 acres, allowing for over 90 acres of available space for businesses keen to utilise the cheaper heat and power to be provided by the EfW plant. Additionally, the site has 80 acres allocated for the construction of a 30MW solar farm.

In addition to Westfield, the Group also holds several parcels of land in Scotland, each of which has options to lease wind farms with a total generation capability of 120MW per annum. One of these options to lease was exercised in 2021 by a major international renewable energy company and construction of the wind farm is underway. Further to this a number of agreements are held whereby proposed wind farms with a generation capability of 450MW can only be accessed through land which Hargreaves controls. These wind farms already have planning permission in place and grid connections secured. The Group expects the build out timetables to result in rental returns to the Group commencing after 2024. This specific element of our Hargreaves Land portfolio represents an exciting opportunity for the Group to support the transition to a green economy within the UK, whilst creating and delivering substantial shareholder value.

Hargreaves Land now has offices in Durham, Glasgow and Leeds as the business looks actively to identify new opportunities. The business currently has visibility of a pipeline of commercial projects with a combined GDV of £65m+ focused in Scotland and the North of England and control over land with the potential for 600 residential homes.

Investment in HRMS

HRMS recorded a post tax profit of £9.0m (2020: £0.9m) for the six months ended 30 November 2021. Profitability has increased in each aspect of the operation, Minerals Trading, the Carbon Pulverisation Plant ("CPP") and DK Recycling. This improvement in profit follows on from the strong results seen in the second half of the year ended 31 May 2021.

The minerals trading business has always been skilled in adapting to market conditions and has again delivered excellent results. The business trades in pig iron, ferroalloys and other speciality minerals. Volumes traded in the first six months of the financial year were 750kt across all products, compared with 415kt in the comparative period. In addition to the increased volumes, margin has also improved, particularly on sales of pig iron, which have seen a sustained increase in pricing throughout the period. As pricing and volumes have increased, so has the demand for working capital within HRMS. To support HRMS in capitalising on the current market conditions, Hargreaves has provided a temporary £15m loan which is due for repayment in the second half.

As previously reported, the CPP is now commissioned and producing product for DK Recycling as well as trial product for other potential customers. The CPP can produce 400kt of pulverised carbon when at full capacity. The plant is on course to produce approximately 100kt in the current financial year. As the business secures orders for the remaining capacity, I expect to see progressive growth in sustainable profits from the CPP over the next few years.

The third element of HRMS, DK Recycling, has also made a substantial contribution to the Group as it has benefited from strong pig iron and zinc commodity prices. The plant takes around 500kt of waste material from the steel manufacturing industry in Germany and recycles it into 285kt of pig iron and approximately 6kt of zinc per annum. That waste material would otherwise go to landfill. Some of the current level of profitability has been driven by the strong zinc and pig iron prices DK is experiencing and to provide greater security over future revenue, forward positions have been taken to hedge 40% of the projected zinc sales for the next 12 months. Additionally, the German management team is now confident that they have created a sustainable level of operational improvement following the acquisition of DK in December 2019.

ESG

The Annual Report for the year ended 31 May 2021 noted that the Group had established a Cross-Business Working Group ("ESG Group") to assess procedures, review methods and identify goals to ensure the business is informed, educated and can act on its ongoing ESG responsibilities. The ESG Group reports quarterly to the Audit & Risk Committee on its progress and its findings will continue to form an integral part of future annual reports and investor presentations.

Environmental

Hargreaves is looking to develop various business initiatives in response to climate change including potentially establishing carbon sequestration on former surface mining sites and providing opportunities for Energy from Waste plants and Wind Farms to be operated from appropriate sites controlled by the Group. One of the key activities of Hargreaves Land is the redevelopment of brownfield sites to bring them back into productive use for both residential and employment purposes. Over 1,200 acres of such land is currently being redeveloped by the Group. Such developments also feature the creation of new ecological habitats that enhance and expand biodiversity.

Social

The Group is working with a mental health specialist to train identified individuals as Mental Health First Aiders. In addition, the Group provides an Employee Assistance Programme which offers confidential support, counselling and advice, alongside a 24/7 freephone helpline for employees and their families to help support their mental health and wellbeing. The Group has also established a Corporate Social Responsibility fund which supports charities, as well as local groups and initiatives that employees are actively involved with.

Governance

The Company is committed to maintaining high standards of corporate governance and has adopted the Quoted Companies Alliance Corporate Governance Code. The Board will continue to develop its governance arrangements particularly in respect of environmental and social issues, including any changes required as a result of the requirements of the Taskforce on Climate-related Financial Disclosures.

Summary

I am pleased with the strong results delivered in the first half with growth in profits in our three pillars of Services, Hargreaves Land and HRMS.

With over 50 term contracts and framework agreements in place and over 85% of Services revenue secured for the current financial year, the opportunities which are within sight in Services at both Hemerdon and HS2 point to substantial further growth. The recent announcements of progress at Blindwells, Unity and Westfield combined with the opportunities within the renewable energy land portfolio demonstrate the reliable income streams I expect from Hargreaves Land in the coming years. Finally, at HRMS, the sustainable improvements being delivered at both the CPP and DK Recycling together with their ability to capitalise on trading opportunities lead me to believe that HRMS will continue to be a substantial contributor of profits to the Group.

Gordon Banham

Group Chief Executive

26 January 2022

Condensed Consolidated Statement of Profit and Loss and Other Comprehensive Income

for the six months ended 30 November 2021

Condensed Consolidated Balance Sheet

as at 30 November 2021

Condensed Consolidated Balance Sheet (continued)

as at 30 November 2021