HARGREAVES SERVICES COMPOUNDING QUIETLY ACROSS INFRASTRUCTURE - 31/01/26

Hargreaves Services (HSP) recently appeared on my radar, prompting a catch-up with management on the day the company released its Interim Results.

The numbers were encouraging, delivered alongside an upbeat tone on future prospects, and it felt like an appropriate moment for me to take a closer look at the business.

For those unfamiliar, HSP is a UK-based diversified industrial and property services group with operations extending beyond domestic borders.

It serves a wide range of sectors, including utilities, energy, mining, and other heavy industrial markets, with some major blue chip names as end customers.

The group operates across several complementary revenue streams: mechanical and electrical maintenance, materials handling, environmental remediation, land development, and raw materials operations.

Through a German joint venture, HSP also recycles and disposes of specialist industrial materials, while its land division focuses on regenerating brownfield and derelict sites for commercial and residential use.

Importantly, what stands out here is the connectivity between these activities, creating operational synergies that enhance efficiency, strengthen customer relationships, and support long-term growth.

From an investment perspective, HSP has combined elements of both growth and income and over the last five years the company has delivered steady revenue expansion which has largely been driven by its services division.

For the year ended 31 May 2025, revenue increased by approximately 25% to £264m, while EBITDA rose 29% to £33.7m.

Profit before tax and cash balances also improved, albeit at a more moderate pace, reflecting a business that continues to reinvest to support expansion.

Cash generation has been a particular strength in recent years, where operating cash flow in FY2025 reached £29.3m, up from £22.6m the previous year.

Although the historical performance has shown some volatility, the recent trend is encouraging and demonstrates the group’s ability to convert accounting profits into tangible cash — a key metric for long-term investors.

Shareholders here already appear to have been well rewarded, where, over the last five years HSP shares have delivered a circa 160% total return, rising from approximately £2.85p to £7.32p.

But, following recent gains — with the shares now trading at £7.46p — the question remains whether further upside is available.

Management’s confidence was clearly evident following the interim results as CEO Gordon Banham highlighted the translation of operational momentum into shareholder value, supported by a 5.4% increase in the interim dividend and the announcement of a £15m tender offer to return surplus capital.

Importantly,  this is not a one-off gesture as the board has committed to increasing dividends in each of the next three full financial years, underlining confidence in earnings visibility and cash generation.

In our catch up, discussion quickly turned to the services division, which remains the backbone of the group and by far its largest revenue contributor.

This business provides highly specialised equipment and services to large-scale, mission-critical infrastructure and industrial projects and contracts typically run for four to five years.

Indeed, in some cases these can even  extend to a decade, providing strong forward visibility and recurring revenues.

A defining feature of these contracts is the high barrier to entry as HSP frequently operates in technically complex environments, including clean energy facilities and major infrastructure assets. Here, safety credentials, regulatory compliance, and long-standing relationships clearly matter more than price alone.

Beyond initial project work, HSP I learnt maintains and services equipment across customer sites, embedding itself within client operations. This integrated model both deepens relationships and enhances margins, strengthening its competitive positioning.

As major infrastructure investment looks set to accelerate across the UK, this division appears well placed to further benefit moving forwards

Underpinning these opportunities is a client base built on decades-long relationships, which management views as a key differentiator and a platform for incremental growth.

Given the nature of its activities, I was keen to understand how management addresses potential operational volatility and contract timing risk, which can prove problematic at times for players across the wider sector.

To this end, the team was open in acknowledging that lumpiness can arise from factors such as procurement delays, extreme weather, and regulatory processes. However, these risks are mitigated through: geographic diversification, the exposure to multiple end markets and a flexible workforce that can be redeployed as required.

Beyond services, HSP has built a meaningful land development operation and this originated from legacy activities.

These left the group with around 15,000 acres of land, primarily in Scotland and over time, management has systematically developed this into a strategic asset.

The land division now focuses on creating fully serviced development sites, incorporating essential infrastructure such as roads, utilities, and schools, before selling plots to housebuilders and developers.

One prime example, is a project in East Lothian enabling the construction of around 1,600 homes and this approach has boosted HSP’s profile within the development community and opened the door to smaller, less capital-intensive opportunities.

Despite challenges within the UK housing market — including planning delays and rising construction costs — underlying demand remains robust.

Within the spot, HSP currently controls around 12,000 plots and maintains a strong balance sheet on which to  execute its strategy.

A recent demonstration of the success of this model came through in the form of the sale of a 16-acre site to Bellway, generating a notable £11.5m from 217 plots.

Within the land arm, HSP also has growing exposure to renewable energy projects and the company participates in wind and battery storage developments through land ownership rather than direct construction.

Typically, HSP leases land to operators, retaining long-term income streams without bearing the development risk, which should resonate with investors.

Worthy of note is news from October of last year, where the first tranche of five renewable assets was sold for initial proceeds of £8.8m, thus validating the model. Management indicated to me that further tranches are expected, alongside longer-term projects currently in planning.

Although primarily UK-focused, HSP maintains an international presence, which provides for operational diversification.

Its Hong Kong operation, which was established in 2012, acts as a regional hub for Asia, providing engineering and maintenance services. This, I was informed, includes supporting clients’ transitions away from fossil fuels.

An operation in South African, launched in 2015, delivers outsourced industrial services to heavy operators, that includes the likes of mining groups. Whilst this plays an integral part of the group operations, there are no plans to extend it, suggesting management is comfortable with its positioning and performance.

Closer to home, the raw materials division operates through a German joint venture, specialising in industrial materials recycling and trading across Europe. End markets here include steel producers, ceramics manufacturers, and other related industries.

Looking at the Interim Results that were announced last week, revenue for the six-month period grew 46% year-on-year to £183.1m, up from £125.3m, whilst adjusted profit before tax increased from £5.3m to £14.3m, reflecting strong operational leverage.

Net cash rose sharply to £37.3m, compared with the £15.7m recorded in November 2024, highlighting ongoing balance sheet strengthening.

On the back of that impressive performance, Broker Cavendish has subsequently upgraded its forecasts for FY2026 and FY2027, projecting: FY2026 revenue of £290m Adjusted PBT of £24.9m and EPS of 62p, with a total dividend of 39p

Although shares have rallied since December, the valuation appears to remain reasonable and on forecast earnings per share of circa 62p, the shares trade on a PE multiple of approximately 12, supported by a progressive dividend policy and strong cash backing.

Margins and ROCE are typical for the sector and reflect the capital-intensive nature of industrial services so although not exceptional, they do look consistent and are improving.

Risk factors obviously exist as with others aligned to the sector, such as timing delays, planning and industrial investment.

But, with extensive established customer relationships with long contract visibility and good diversification, then HSP is worthy of my interest.

Whilst not a high-margin business, it is well run, resilient, and positioned to benefit from structural investment trends across infrastructure, energy transition, and urban development and appears one of the better options to this investor.

And with  shares trading on a modest valuation, backed by a growing dividend and a solid balance sheet, HSP could be well suited for other investors seeking both near-term income and longer-term capital growth.