Hercules Site Services – showing unexpected strength but why?
I have been more than interested to note the recent upward momentum in the shares of Hercules Site Services (LON:HERC), the leading technology enabled labour supply company specialising in the UK infrastructure sector.
Following the report of its end September 2022 annual results on 16 January, the group’s shares had held steady at around the 54.5p level, up from 50.5p ahead of the statement.
That price held for the subsequent month, until just a day after Valentine’s Day.
They put on just over 5% to close at 57.5p on 16 February, on the back of 84,326 shares traded, against the normal daily of around 25,000 dealt.
Then 121,152 were traded the next day, closing at 58p.
On Monday of this week the volume was 141,080 with a close at 59.5p.
Tuesday saw only 38,631 traded, closing 1p higher at 60.5p.
Then on Wednesday the volume increased to 150,779 shares traded, with the price ending the day at 65p.
Last night the number of shares dealt slipped back to just 60,911 traded, with them closing at 68.5p, 3.5p better on the day.
The £40.2m capitalised group, which only achieved its AIM listing on 4 February last year, was founded in 2008.
Over the years it has established track record of profitability and fast-growth and has built a blue-chip customer base which includes Balfour Beatty, Costain, Kier, Skanska, Dyer & Butler and Volker Fitzpatrick.
The Cirencester-based company has been appointed to provide labour for a range of high-profile infrastructure projects, such as HS2, due to its agile, innovative, digital first approach and complete service offering.
The principal activity of the company is that of general construction and civil engineering. It provides labour-related and a diverse range of other services to many blue-chip clients in the infrastructure sector.
It supplies skilled labour, civils projects, hire out suction excavators and other plant, and provide digital solutions for construction recruitment and workforce management.
The company provides general operatives, groundworkers, skilled operatives, machine operatives, gangers, dumper drivers, carpenters, concrete finishers, banksmen, brick layers, plasterers, pipe layers, steel fixers, scaffolders, foremen, security, cleaners, site supervisors, and site engineers.
It serves various sectors, such as general civils, highways, utilities, rail, power, and energy.
The group, therefore, is well-placed to benefit from any government increase in infrastructure spending and its experienced management team has identified multiple opportunities for growth.
The 2022 Finals
The end September 2022 results for the group showed a better than expected 51% growth in revenues to £49.5m (£32.7m), but pre-tax profits were down from £515,517 to £160,685.
On an EBITDA basis they showed £2.31m (£2.43m), while the net profit on the year was £320,900 against a net loss of £56,200.
The pre-tax profit before exceptional non-recurring items, such as the group’s costs of going public, were £631,949 (£1.4m).
On announcing the 2022 results CEO Bruno Korkmaz stated that:
"Hercules has enjoyed positive year-on-year growth in 2022 which has seen us successfully deliver on our strategy and achieve momentum across all areas of our business. In doing so, we have continued our long-term track record of creating value for our stakeholders.
"The UK infrastructure sector continues to forge ahead, with the UK government recently making strong commitments to deliver significant investment in our rail infrastructure, while recent banking reforms announced by Chancellor Jeremy Hunt in December are being hailed as potentially unlocking billions of pounds of funding for UK infrastructure.
"As these results show, Hercules is ideally placed to benefit from the buoyant market conditions and we have invested in our business during the period to prepare for continued growth in the months and years ahead. We have been implementing a successful strategy to tackle wage inflation and post year-end trading has been very encouraging, underpinning our confidence for the current year."
Significant Shareholders – very tightly held
Unusual for nowadays, some 71.44% of the group’s equity is held by the CEO, while Premier Miton Fund Managers hold 13.2%, with the Linista Group having 8.44% of the 58.65m total.
That leaves only 7% of the company’s shares for other holders.
Broker’s View – 80p price objective
For the current year to end September 2023, analyst Tania Maciver, at the group’s brokers NOMAD and Broker SP Angel, has a discounted cash flow analysis value of 80p on the group’s shares.
She rates the shares as a Buy.
Her estimates for 2023 are for £74.21m revenues with a pre-tax profit of £632,800.
For 2024 the guesses are for £82.4m sales and a strong £1.65m profit.
Maciver’s estimates for 2025 and 2026 are for £3.09m and £4.32m profits respectively.
My View – price rise reflects prospects for the next few years
With such an incredibly tight equity, it is perhaps of little surprise that the shares are reacting higher in the face of any demand.
With the group’s AGM due to be held on Monday 13 March it has to be hoped that the AGM Statement will be particularly positive.
At the current 68.5p they are a very strong hold.
(Profile 04.05.22 @ 52p set a Target Price of 64p*)
(Asterisks * denote that Target Prices have been achieved since Profile publication)