Planning Approvals Will Unlock 81 Million Sq Ft Of Industrial Space

Key Takeaways

• Strategic focus on industrial and logistics expansion is expected to boost revenue from land sales and development management.
  
• Retaining more developed properties will enhance rental income, improving net margins and earnings.
  
• Delays in planning and cost inflation could affect revenue and margins, while regional focus and policy changes increase financial and market risk.

Catalysts

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

• Harworth Group's strategic focus on expanding its industrial and logistics portfolio, including the notable Microsoft land deal, is expected to boost future revenue from increased land sales and development management.
  
• Planning approvals for 8.1 million square feet of industrial and logistics space and 26,000 residential plots poised for development will likely lead to revenue growth and improved profit margins, given the high demand in these sectors.
  
• The strategy to retain more directly developed properties in the investment portfolio is projected to enhance rental income, thus positively impacting net margins and earnings over the coming years.
  
• Expected growth in recurring rental income from a larger Grade A investment portfolio by 2027 should support an improved dividend profile, benefitting overall earnings per share.
  
• Harworth's low net loan-to-value ratio and strong liquidity position them well for planned growth, ensuring a stable financial base for future capital investment and operational scaling, which will likely impact future net margins favorably.

Harworth Group Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Harworth Group's revenue will grow by 24.0% annually over the next 3 years.
• Analysts assume that profit margins will increase from 52.2% today to 61.8% in 3 years time.
• Analysts expect earnings to reach £112.6 million (and earnings per share of £0.3) by about February 2028, up from £49.9 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 8.2x on those 2028 earnings, down from 10.8x today. This future PE is lower than the current PE for the GB Real Estate industry at 24.1x.
• Analysts expect the number of shares outstanding to grow by 0.14% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.64%, as per the Simply Wall St company report.

Harworth Group Future Earnings Per Share Growth

Risks

• Harworth Group faces challenges with planning applications taking longer to process due to increased complexity, which could delay revenue and affect cash flow.
  
• The company has a significant amount of development planned, but ongoing wage and construction cost inflation could squeeze net margins.
  
• A regional concentration in the Midlands, Yorkshire, and the Northwest might increase risk exposure to region-specific economic downturns, potentially impacting revenues from those areas.
  
• Although Harworth has strategic plans relying heavily on large industrial and logistics sites, any significant changes in government policy, particularly around housing and infrastructure, may impact the execution of their strategy, affecting revenue targets and profit margins.
  
• Potential future increases in leverage might stress financial stability if the strategy execution falters or market conditions deteriorate, thereby impacting net margins and earnings.

Valuation

• The analysts have a consensus price target of £2.207 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 £2.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be £182.0 million, earnings will come to £112.6 million, and it would be trading on a PE ratio of 8.2x, assuming you use a discount rate of 8.6%.
  
• Given the current share price of £1.66, the analyst price target of £2.21 is 24.8% 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.