HARL shares are rocketing after years of decline. The FTSE AIM company’s immediate fortunes could hinge on one hotly anticipated project.
Author: Charles Archer
Harland and Wolff (AIM: HARL) shares have shot up by 70% over the past month to 10.16p, giving the FTSE AIM company a respectable £17.5 million market cap. In fact, HARL’s up 27% over the past five days alone.
While HARL is a highly diversified company, this rapid share price movement can only be explained by investor confidence in its chances to benefit from one major project.
Harland and Wolff share: a brief overview
For the uninitiated, HARL is an 1861-founded heritage stock, which has worked on iconic projects including the RMS Titanic, RMS Olympic, and the Myrina tanker, the first supertanker built in the UK.
The multisite fabrication company has a complex structure, operating within the maritime and offshore industry though six divisions, five markets, and four essentially separated sites. However, for simplicity, it is focused primarily on strategic energy infrastructure, fabrication, shipbuilding, and vessel repairs. HARL now operates two of Europe’s largest drydocks and two of the largest specialist fabrication sites in the UK.
It also owns the Islandmagee gas storage project, which is expected to provide circa 25% of the UK’s natural gas storage when completed. This a strong asset to have on its books, especially as the UK’s lack of energy resilience has been partially blamed on the lack of gas storage compared to European peers. And DAERA agreed to issue HARL the necessary licence in mid-October, which has been partially responsible for the recent share price action. Court hearings are to be heard.
Having made several acquisitions through 2020-21, HARL is now a fully diversified business, which many argue simply needs a catalyst to properly see its value recalibrated.
On the other hand, shareholders have been diluted over the past year as the company sought to raise capital to reactivate its various assets. For example, a year ago, it placed a massive 7.5 million shares at 20p, compared to an at-the-time 29p close.
However, in mid-October CEO John Wood enthused that ‘an equity release is not palatable at this time.’ But I suspect this could potentially change if a large contract requiring further cash came it’s way.
Harland and Wolff shares: contracts and debts
Despite the recent share price increase, HARL is worth roughly a quarter of what was just five years ago and has fallen by 45% year-to-date. And at circa 10p per share, HARL has only just recovered to its share price value from the start of September.
The question now is whether it can go further.
At first glance, it appeared that HARL was dealt a hammer blow a few days ago, when the successor to the UK national flagship, the Royal Yacht Britannia was scrapped.
As one of two finalists to potentially land the £250 million contract to build it, CEO John Wood was ‘certain that had the national flagship gone ahead, the vessel would have returned many multiples of her build cost to the UK economy over many decades…we had expected to use the national flagship as the launch platform for green shipbuilding.’ However, the CEO expects the project could ‘come back to the table in the future.’
But when one door closes, another opens. HARL has already won several major contracts over the past few months, including a £55 million contract for the M55 regeneration programme in July, and its largest export contract ever for the fabrication of eight ground anchor and A-space frames by a Greenland-based mining company in August. And it also holds significant ongoing contracts with Cory Group.
In half-year results, the company saw revenues more than treble from £4.14 million in the year-ago period to £15.14 million. But despite a respectable operating margin of 22%, and gross profit more than doubling to £3.38 million, the company’s operating loss before depreciation, amortisation, and financing costs nearly doubled to £14.06 million, reflecting ‘an increase in the number of personnel and overall overheads, reflecting the need to service five assets.’
However, this increased spending could pay off. As a result of recent contracts, revenues are expected to be weighted towards H2, and full-year revenue should hit circa £70 million.
Wood notes that the ‘business model and strategy remain robust and has been validated not only by the fact that we are now operational in all five markets, but also by external counterparties such as Riverstone… we have a backlog of over £100 million, a record level for the Company, affording us strong future visibility of revenue.’
Future contracts
Last week, HARL noted that it had refinanced a new £70 million debt facility with Astra Asset Management on better economic terms, which it hopes to increase to £100 million soon. As part of the two-year agreement, HARL will issue Astra with 12 million warrants over ordinary shares at an exercise price of 6.2385p per share, expiring in 60 months.
Wood told investors this will be ‘incredibly useful to meet our capital expenditure and working capital obligations towards some key and large contracts that we have been negotiating over the last 18 months, due to come to fruition in the next couple of quarters.’
Some investors have taken these words as a hint that its shipbuilding division could soon see a huge new contract. After the award of the M55 contract, HARL’s credentials within the defence market have shot up, and it has already noted that ‘with the twin political agendas of shipbuilding and levelling-up, it is well positioned to bid for defence and government-related contracts as invitations to tender arise.’
The most hotly anticipated announcement regards a bidding process for the UK’s Fleet Solid Support Programme (FSS), potentially worth up to £1.6 billion. HARL is formally engaged in the Programme under the Team Resolute umbrella with Navantia as the Prime Contractor and itself as its sub-contractor.
The preferred bidder is to be announced imminently, and if Team Resolute wins, the work could be worth hundreds of millions of pounds to the company. Notably, HARL ‘remains optimistic that the preferred bidder status will be awarded to Team Resolute,’ but also thinks that even if its bid fails, ‘there will be significant subcontract opportunities with other Primes should they be awarded preferred bidder status given the lack of capacity in other UK yards.’
In a recent boost for HARL, the government has just awarded a £4 billion contract to BAE Systems for five new Type 26 anti-submarine frigates, in addition to the three already in commission. With the ships expected to be built by the mid-2030s, this could create further opportunities for more subcontracting work. But more importantly, BAE now no longer has building capacity for the FSS programme.
And with a decision due imminently, this could be the catalyst HARL investors have been waiting for.
Author: Charles Archer
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.
References:
Full Marine License Issued By DAERA (islandmageeenergy.com)
H&W ‘disappointed’ as defence plan shelved – BelfastTelegraph.co.uk
Harland and Wolff secures cash injection (energyvoice.com)
UK Awards BAE £4.2 Billion Contract for Royal Navy Frigates – Bloomberg
