HARL shares have experienced significant volatility in recent weeks, but a push higher remains on the cards for investors with a healthy risk appetite.
Harland & Wolff (LON: HARL) shares are at this point a relatively stressful investment for long term position investors. Not only is the company down by 42% over the past five years, but the long term expected catalyst, its new defence contract, has not had the share price impact that many may had hoped for.
But the surge to 30p and beyond could be coming soon.
Rising to 25.9p on 24 November, the shares fell to 15p in mid-January, rose to 20.6p on 18 January, and then dipped again to today’s price of 17.3p. Of course, it’s worth noting this share price is still treble its pre-contract award point.
HARL shares: trading updates
On 13 December, HARL announced it was delaying the judicial review of its Islandmagee Gas Storage Project until 2-5 May 2023. CEO John Wood noted that while ‘it is disappointing that this has been delayed, we now have access to the majority of the submissions made and we remain confident that we will see a successful outcome to this review.’
But worse was to come on 30 December, though the RNS didn’t seem to me as bad as initially reported. In brief:
1. The £55 million M55 Regeneration Programme by the MOD on behalf of the Lithuanian Defence Materiel Agency saw the company unable to ‘undertake certain key workstreams during the fourth quarter of FY 2022 due primarily to a lack of material availability and specialist Original Equipment Manufacturers’ parts.’ Accordingly, £30 million of revenue was deferred into H1 2023, though HARL states ‘the overall project is still on track.’
2. The company also saw ‘certain other clients within the cruise and ferry market either defer their contracts into 2023 or reduce the scope of works,’ blaming geo-political uncertainties and global inflation. Problematically, the company has lost Q4 FY22 revenues of between £8 million and £10 million, though again expects this amount to simply be ‘deferred to H1 2023.’
3. HARL terminated (with mutual agreement) its contract with Saipem for the fabrication of four wind turbine generator jackets for the offshore NNG project. With the contract initially agreed in April 2021, the FTSE AIM business cited ‘numerous issues with payments, delays and defective materials, with resultant cost escalations which the Company has determined it will not bear,’ purely from a margin perspective. However, HARL has already tendered for a large number of fabrication programmes with award decisions due in 2023 at Methil, so this may be good news wearing bad make-up in the long run.
Overall, where previously the company had predicted it would generate between £65-£75 million for FY22, it’s now revised this estimate down to £29-£31 million. However, this is still a 56% 12-month period increase, and HARL ‘remains confident that the bulk of the revenues attributable to FY 2022 will be booked during the course of H1 2023.’
Fleet Solid Support contract update
While these two trading updates were disappointing, they are essentially irrelevant to the larger picture, which is of course a ‘material portion’ of the £1.6 billion FSS contract.
On 16 November, HARL was part of Team Resolute, awarded ‘preferred bidder’ status for the contract, and on 18 January senior partner Navantia formally signed the contract at HARL’s Belfast facility with Defence Secretary Ben Wallace.
HARL investors are now waiting for ‘the execution of the sub-contract between Navantia and the Company, which is expected to occur in the next couple of weeks. On the execution of the sub-contract, the Company will make an announcement setting out in further detail, inter-alia, the scope of works to be undertaken by the Company commencing immediately upon signing of the sub-contract and leading up to full scale production on FSS.’
To be clear, Wood has said that the Team Resolute consortium is ‘committed to carrying out 60% of the work here in the UK, so I’ll let you do some maths on that.’For context, Navantia is also expected to invest £77 million in the modernisation of HARL’s Belfast shipyard, while the MOD has advised that 1,200 jobs will be created at British dockyards.
HARL has a market cap of just £30 million.
Debt and financing
HARL recently agreed to increase its interim financing agree with Riverstone from $70 million to $100 million. It’s also negotiating with Astra Asset Management to increase its current £70 million facility to £100 million and hopes to increase this further to between £150 million and £200 million. HARL notes that ‘as the Company executes larger contracts, it believes that it is crucial to maintain a significant quantum of liquidity with a larger committed facility that can be drawn down as and when needed.’
Excitingly, the company is also formally engaged with UK Export Finance but acknowledges ‘there can be no guarantee of UKEF’s formal participation at this stage and such participation will be subject to UKEF’s own due diligence processes and formal credit committee approval.’ Given HARL’s position in delivering the FSS contract, it seems likely to me that financing will be forthcoming — but this usually takes time.
Some investors are concerned that a placing is coming. Wood recently noted that ‘key to our development and a successful transformation is having a balanced funding stack in place.’ While mentioning the current debt facilities in the same breath, this kind of terminology is unwelcome to investor ears.
However, with a £30 million market cap, a share placing on its own simply wouldn’t provide Harland & Wolff with sufficient capital to make a dent in its short-term financial needs. Of course, it cannot be ruled out, but the combination of Riverstone, Astra, Navantia, and potentially UKEF funding should be enough to start delivering on the FSS contract.
And if not, a strategic investor would make more sense.
Investors are now waiting for FSS sub-contract details to come out in the next few days — at which point HARL shares could finally hit 30p and beyond.
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.
