Data Center Projects Like Skelton Grange Will Unlock Future Potential

Key Takeaways

• Strategic industrial and logistics growth, alongside rental income and diversification, is set to enhance Harworth Group's future earnings and cash flows.
  
• Low leverage provides flexibility for funding growth initiatives, potentially increasing future earnings through strategic land and development activities.
  
• Market and macroeconomic risks, speculative development, increased expenses, interest rates, and planning challenges may impact revenue, profitability, and margins.

Catalysts

Operates as a land and property regeneration company in the North of England and the Midlands.

• Harworth Group's strategic focus on growing its industrial and logistics investment portfolio to £0.9 billion by the end of 2029, alongside increasing higher average headline rents, is expected to boost future earnings through rental income and potential dividend growth.
  
• The company's extensive consented pipeline of 8.4 million square feet for industrial and logistics development, with significant derisking of over two-thirds of this pipeline, underpins revenue growth potential and strengthens future cash flows as developments are completed and rented out or sold.
  
• Harworth Group's strategy to diversify into higher-value uses, such as data centers, provides opportunities to increase revenue and net margins by capitalizing on market demand for such specialized spaces, as seen in transactions like Skelton Grange with Microsoft.
  
• Continued investment in strategic land assembly and progressing sites through the planning process delivers value gains and enhances future revenues, with £40 million in value gains from planning progress reported in 2024, indicating an ability to unlock further financial growth through development activities.
  
• The company's low leverage, with a net loan-to-portfolio value of 5.4%, allows financial flexibility to fund future growth initiatives, potentially leading to increased earnings as new development projects are undertaken and completed.

Harworth Group Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Harworth Group's revenue will decrease by 7.1% annually over the next 3 years.
• Analysts assume that profit margins will increase from 31.5% today to 66.2% in 3 years time.
• Analysts expect earnings to reach £96.2 million (and earnings per share of £0.36) by about March 2028, up from £57.2 million today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 9.9x on those 2028 earnings, up from 9.6x today. This future PE is lower than the current PE for the GB Real Estate industry at 23.8x.
• Analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 9.4%, as per the Simply Wall St company report.

Harworth Group Future Earnings Per Share Growth

Risks

• Market volatility and macroeconomic uncertainty are highlighted as ongoing risks, potentially affecting revenue and earnings stability.
  
• Relying on speculative development may carry execution risks if the market conditions change unfavorably, impacting future revenue and profitability.
  
• Increased administrative expenses due to higher employee numbers could put pressure on net margins if revenue growth does not keep pace.
  
• The company is operating in an industry where interest rates significantly impact forward funding opportunities and overall financing costs, which could affect net margins and earnings.
  
• Potential challenges in the planning process, despite current improvements, could hinder future development progress, affecting long-term revenue growth.

Valuation

• The analysts have a consensus price target of £2.257 for Harworth Group based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of £2.52, and the most bearish reporting a price target of just £2.1.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be £145.4 million, earnings will come to £96.2 million, and it would be trading on a PE ratio of 9.9x, assuming you use a discount rate of 9.4%.
  
• Given the current share price of £1.7, the analyst price target of £2.26 is 24.4% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.