HARL released full-year results last Friday evening just before 6pm. This is not a good look, and the share price has responded accordingly.
HARLAND & Wolff (LON: HARL) shares were changing hands for less than 6p in November 2022, before soaring to 25.9p before the end of the month — as it landed a ‘material portion’ of the long-awaited £1.6 billion FSS contract.
However, the FTSE AIM stock has since fallen back to 10.1p — driven by falling investor interest and a relatively poor full-year set of results. As a long-term investor in the turnaround story, I am not particularly stressed about the increased losses, but the reality is that the cash position will need to be addressed shortly.
Fortunately, there are several solutions to this — which I’ll run through below.
HARL shares: full-year results
Filing results just as investors are starting their second weekend mojito is generally a case of damage limitation. Revenues may have risen from circa £18.5 million to £28 million, but HARL also saw losses rise to over £70 million compared to just £25.5 million in the 2021 period.
However, it’s worth noting that the company is in the dangerous middle stage of its transition; core employees have increased to 769, up from 410 in 2021. While it did enter into a corporate debt facility of $100 million last year with Riverstone Credit and is expected to generate £750 million from its portion of the FSS contract over the next seven years, profitability is still some time away.
CEO John Wood notes that the ‘contracted backlog now sits at approximately £900 million…whilst the FSS subcontract is a game-changing contract win for the Company, it will take several years to deliver, and we still have a lot to achieve over the next two years in order to turn this Company into a target £500 million per annum business.’
It’s worth remembering that the company is seeing a £77 million investment to upgrade the Belfast yard, which will make it the most advanced state-of-the art shipyard in the UK. Further, the FSS government contract is protected from inflation.
And the contracted backlog now stands at £900 million including the FSS contract. Financially, the £18 million company is negotiating with UK Export finance and a ‘syndicate of private lenders and commercial banks’ to complete a £200 million refinancing facility.
Approval of this facility relies on the Independent Business Review Report, published by Grant Thornton at the end of May, which was broadly positive but highlighted the challenge of ‘human and capital resources to take this business to a £500 million p.a. company.’
However, talks are now at an ‘advanced stage’ and HARL expects the refinancing to be concluded in ‘early Autumn 2023’ — a five year deal where it must ‘get the economics right.’
Beyond this, the company enthuses that ‘uncontracted weighted pipeline of opportunities increased from £1.36 billion to over £2.50 billion over a five-year period.’ The plan is to become a £500 million turnover company with a blended gross margin of 24% to 27% by 2025/26, and HARL is now in the third year of this turnaround strategy.
However, that’s an aspiration and not the current materiality.
2022 saw a gross margin of just 20.57%, down from 28.21% in the prior period. Operating losses stood at just over £58 million, but again ‘a substantial proportion of this was related to the recruitment of personnel across the board in preparation for bidding on large value contracts.’
Wood advises that ‘it is imperative that we keep growing our team and build key skills in-house. Whilst this strategy has an adverse short-term impact of skewing operating costs, over the longer term, we believe it will lead to significant cost savings by avoiding the excessive use of external consultants.’
However, the underlying problem through 2023 and 2024 is that these employees will be underutilised until work starts on the FSS contract in 2025 — leaving the company with a short-term funding gap. Indeed, HARL now has a net debt position of £82.5 million, up from just over £14 million in 2021.
This ‘highlights the fact that (HARL) are under-capitalised and would need to balance our capital stack in due course.’
Where to get the cash from?
As a long-term investor, I wouldn’t mind a share placing. When you have a solid growth strategy, then taking on debt and issuing new equity is part and parcel. However, the market cap was too low to support a placing several months ago, and it’s even more so the case today. HARL may soon get hold of extra financing from UKEF, but it also needs to prove its own power as a going concern.
In steps Islandmagee. If the Judicial Review goes the company’s way — and I have covered this before — then HARL could sell the asset for circa £50 million. The JR outcome is expected ‘in the second half of 2023’ and having sought legal opinion, the company considers that the challenge to its licence has ‘limited chance of success.’
While HARL is exploring funding options, it has also outright stated that it has ‘received interest to sell the project in its entirety.’ If it can get at least £50 million for the asset in H2 2023, and also get approval for the £200 million facility from UKEF, then HARL shares will respond.
I have argued for some time that selling Islandmagee is in its best interests.
Regardless, this is a long term opportunity, and 30p remains the target for high risk investors.
This article has been prepared for information purposes only by Charles Archer. It does not constitute advice, and no party accepts any liability for either accuracy or for investing decisions made using the information provided.
Further, it is not intended for distribution to, or use by, any person in any country or jurisdiction where such distribution or use would be contrary to local law or regulation.
