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  • Writer's pictureMark Watson-Mitchell

Hercules Site Services – looking to gain strength

On Monday morning Hercules Site Services (LON:HERC), which claims to be a leading technology-enabled labour supply company for the UK infrastructure sector, announced its interim results for the six months to end March 2023.

They certainly looked positive enough to get the shares bumping off and out of their recent 34p to 45p price range, which has been enduring since the end of February.

The shares are currently trading at around the 36.5p level, which I believe offers a cheap buying opportunity.

The business and its clients

The Cirencester-based company, which was set up in 2008, floated on AIM early in February last year.

It engages in general construction and civil engineering for construction industry.

The £22.79m capitalised company offers labour supply, as well as delivers civils projects; hires suction excavators and other plants; and provides digital solutions for construction recruitment and workforce management.

It serves the general civil, highway, utility, power and energy, and railways sectors.

With blue-chip and top-name clients like Balfour Beatty, Kier, Hochtief, Thames Water, Galliford Try, Highways England, Strabag, Skanska, Anglian Water, Volker Fitzpatrick, Atkins, Vinci, Costain, Morrison, SMB, Southern Water, Black & Veatch, Dyer & Butler, and even HS2, this company is certainly playing in the big boy’s marketplace.

The interims

For the first half to end March the group reported that its revenue increased by 85% to £37.0m (H1 2022: £19.9m), while its gross profit was up 71% to £6.9m (H1 2022: £4.0m). Its adjusted EBITDA improved 73% to £1.13m (H1 2022: £0.65m), however, it maintained its interim dividend at 0.6p per share.

Management comment

CEO and majority shareholder Brusk Korkmaz stated that:

"We are delighted to have delivered a positive start to the year, with revenue growing by 85% and an increase in gross profit of 71% over 2022 levels, whilst we continue investing in support of further value creation in H2 2023.

This success has been achieved through the continued labour supply services ramp-up at the HS2 northern section, the addition of new clients across all areas of our business and the delivery of more suction excavators in the period.

We are also very pleased to see that our Skills, Employment and Education Everything Portal has become revenue generating, demonstrating again that we are at the cutting edge of labour supply and services innovation in the construction sector.

The addition of new clients, namely Amey and SGN, has also further accelerated growth in our civil projects division.

With this strong momentum in the construction and infrastructure sectors, and a solid pipeline of new clients, we are ideally placed to maintain the levels of growth we have delivered in recent years and are on track to meet market expectations for the full year."

The Equity

There are some 62.4m shares in issue. Hercules Real Estate (Brusk Korkmaz) retained 41.90m shares, representing 67.1% of the equity.

Larger investors include Premier Miton Group, holding 8.08m shares with 12.9% of the equity, and the Linista Group which owns 6.06m shares, some 9.71% of the group’s equity.

Chairman’s statement

Non-Executive Chairman Henry Pitman stated that:

“The Company's financial performance is traditionally H2 weighted, and we are pleased with trading to date.

Between now and the year-end, we look forward to executing on our current pipeline and delivering on our strategy. We continue to advance our training academy plans, which represent a medium-term objective for the business, and to nurture a range of opportunities to achieve additional scale for the Company.

With demand for our services expected to remain strong given the market backdrop, we look forward to the remainder of the year with confidence and updating shareholders along the way.”

Broker’s View – price objective of 80p

Analyst Tania Maciver, at the group’s NOMAD and Joint Broker SP Angel, uses a discounted cash flow valuation to derive an equity value of around £44.5m, which translates to a price objective of 80p a share.

That would represent a return of over 115% compared to the current share price.

She reported that :

“Hercules has again reported strong financial results, delivering on management’s commitment for growth. The second half of the year is expected to be progressively better than the first half with continued increases in labour required for HS2, as well as to existing and new customers across the UK; the suction excavator fleet now at 30 vehicles continues to operate at a utilisation rate of on average 80%, and the Civil Works team has taken on new clients with ~20 projects ongoing in H1 2023.”

Her estimates are for the year to end September to show revenues of £74.2m (£49.5m) and an adjusted EBITDA of £3.53m (£2.31m) taking pre-tax profits up to £0.59m (£0.16m) and lifting earnings up to 1.0p (0.6p) per share.

Jumping forward into the 2024 year she is looking for £88.9m revenues and £1.65m profits.

My View

When everyone is digging for gold, the best thing to do is to sell shovels!

Labour demand is at its highest level for over 20 years, while there is a colossal mountain of infrastructure projects to be handled, which makes me consider that Hercules is very well positioned to gain significantly over the next few years.

The company reported that the infrastructure and construction sectors are experiencing continued buoyancy, providing a supportive backdrop for its growth, and recent research demonstrated that this is continuing post period end.

In classical mythology, Hercules was famous for his strength and for his numerous far-ranging adventures – could Brusk Korkmaz be emulating his hero’s endeavours in charging his group forward.

I must say that I was somewhat disappointed by the market antics ahead of the end February 2023 ‘working capital’ £1.7m Placing at 45p, after the shares had been spoofed up to 73p in a very quick period of time, just prior to the issue.

So, when I see the shares now at 36.5p my gut is telling me that the market is trying to level the pricing out, in so doing it is challenging Korkmaz to now produce the goods for investors.

At the current 36.5p price level, existing shareholders should consider averaging.

(Profile 04.05.22 @ 52p set a Target Price at 65p*)

(Asterisks * denote that Target Prices have been achieved since Profile publication)


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