Pre-Close Trading Update

RNS Number : 8887I

Hargreaves Services PLC

14 December 2015

 

For immediate release

14 December 2015

Hargreaves Services plc

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

Pre-Close Trading Update

Hargreaves Services plc (AIM: HSP), the UK's leading supplier of solid fuels and bulk material logistics, provides an update on trading.

Current trading conditions and the outlook in the coal and steel markets have continued to deteriorate. In addition, the continuing warm weather has added further short term volume and margin pressure across almost all of the Group's major coal markets. Whilst the Company remains in a robust position in terms of gearing and cash generation, the deterioration in the coal and steel markets will further impact trading and outlook in all three divisions.

Coal Production and Trading

In light of current thermal coal prices, the Group will be restructuring its mining plans to reduce Scottish production to circa 500,000 tonnes per annum whilst remaining committed to completing all of its current restoration schemes. In conjunction with these revised plans the Group is investing in new and enhanced coal processing facilities which will reduce to a minimum production exposure to loss-making thermal coal. The capital investment required to deliver that capability will be around £1m. The Group will incur additional charges of £1.1m in this financial year to deliver the revised and reduced mining plan.

Coal burn in the UK remains at low levels unprecedented for this time of year. There is currently no evidence that new sales demand from our coal station customers will be seen before the end of the winter and as a result we are reducing our budgeted third party sales volumes for the remainder of the year from 500,000 tonnes to a negligible level.

In the domestic heating market the unseasonably warm weather will adversely impact volumes and prices and we have reduced our profit expectations by £0.5m for the second half on the assumption that the present weather pattern persists across the balance of the year.

Profit forecasts for our Tower joint venture for the second half of the financial year have also been reduced to reflect similarly weak demand for its thermal coal and the likely impact of coal price on the uncontracted tonnage at the end of the financial year. We expect the Group's share of profit on the Tower joint venture to be reduced by £1m. The Group will continue to carefully monitor its exposure to the Tower project, where loans currently extended to the joint venture amount to £23.5m. Whilst the Group remains confident of being able to recover these balances fully under current mining plans as the mining project continues, the Board also continues to assess the risks that would be presented by an early closure of Aberthaw power station.

Industrial Services

Operating profit expectations for Industrial Services have been reduced by £1.3m. This reflects margin pressure and a significant reduction in spend by our thermal and steel customers due to the low production levels being experienced in both markets, but particularly in the UK steel sector.

Transport

Despite a strong start to the financial year, we have recently seen a marked reduction in general waste market flows following the downturn in the business of a significant North East landfill operator. This reduction in general volumes has been exacerbated by a reduction in coal movements, the low seasonal movements of rock salt and a recent decline in construction sector activity. Operating profit forecasts are being reduced by £0.5m to take account of these factors.

Net Debt

Debt at 30 November 2015 was £31.8m. Cash generation in the second half is expected to be in line with management's previous expectations, as coal and coke stocks continue to unwind and more than offset the impact of reduced trading profit.

Outlook

In these difficult markets the Group continues to take all the steps possible to mitigate major risks. All of our expectations are based on existing coal stocks being marked down to current spot market prices. The Group, including Tower, does however retain open stock positions on approximately 300,000 tonnes of coal and 80,000 tonnes of coke and we remain of the view that the cost of hedging that product outweighs the risk of further short term negative impacts on forward earnings.

The Group continues to work hard to develop value across its property portfolio and will provide an update on progress with the interim results. We would expect our first meaningful realisations in FY17.

The Group expects to report its interim results on 16 February 2016.

For further details:

Hargreaves Services Gordon Banham, Chief Executive Officer Iain Cockburn, Finance Director	0191 373 4485
Buchanan Mark Court  / Anna Michniewicz / Sophie Cowles	020 7466 5000
N+1 Singer Sandy Fraser / Nick Owen	020 7496 3000
Jefferies Hoare Govett Harry Nicholas	020 7029 8000

 

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