Hercules Site Services Plc (LON:HERC) has reported another year of 50%+ Top Line Growth.
SP Angel Analyst John Meyer has provided the following report.
Hercules Site Services plc completed an IPO on the AIM market of the LSE in Feb 2022. Hercules’ core business is the provision of labour to its blue-chip clients operating within the infrastructure sector of the UK construction industry. Outside of the Labour Supply Division, Hercules operates a Construction Services Division that includes civil engineering project management, Suction Excavator Services, and mobile health solutions for workers on-site. HERC has developed a digital application platform, a key differentiator in labour supply services, that assists with the recruitment and on-boarding of accredited workers for its clients and is being further developed to provide data analysis and optimise on-site labour productivity and cost efficiency.
Trading update: F2023 Revenue and EBITDA Ahead of Expectations
▪ HERC expects revenue for F2023 (year-ended 30 September) to be over £80m, representing an increase of ~60% y/y (F22: £49.5m) and at least 8% better than our previously revised forecasts of £74.2m.
▪ This, in turn, should translate to higher-than-expected Adj. EBITDA. Our previously revised forecast was for £3.5m Adj. EBITDA for the year.
This better-than-expected performance was the result of strong organic growth across all of Hercules’ divisions.
▪ Labour Supply: Strong performance has been driven by ongoing work for HS2 Phase 1 (430 operatives onsite by year-end), and expansion into new labour divisions such as white collar and site security personnel. In addition, HERC launched its ‘live tracks’ rail offering (post year-end) in support of the five-year contract with Balfour Beatty Rail Ltd.
Recall that for H1 2023 HERC reported revenue of £28.1m from Labour Supply, +110% y/y. Performance is on track to beat our Labour Supply forecast of ~£55m for the full year, particularly as H2 revenues are typically seasonally stronger than that of H1 across all Hercules’ divisions.
▪ Civil Works: Recall that for H1 2023 HERC reported revenue of £6.7m from Civil Projects, +31% y/y with work ongoing for about 20 projects. Furthermore, since May 2023 the Civil Projects team has secured new projects valued at over £3.1m that includes 9 projects in wastewater treatment and water management for two major clients.
Our forecasts include revenue of ~£13m for Civil Projects in F2023. Given the update this forecast is likely to be lower than expected given recent announcements. Notably the gross margin target for this division is set at an average of 15%, with more specialised projects coming in slightly higher.
▪ Suction Excavators (SE): Recall the SE division was expanded to 30 vehicles by the end of H1 2023, resulting in one of the largest fleets in the industry. With a fully operating fleet in H2 2023 and continued strong utilisation rates, we expect revenues in this division to have more than doubled over the £2.2m reported for H1 2023. Recall the SE division is a strong contributor to gross margin with a target average of over 50%.
Revised top line F2023E forecasts: In light of this trading update, we revised our F2023 revenue forecasts to £80m, from £74.2m (+8%). Without changing any other assumptions at this point, this results in increased Adj. EBITDA to £3.7m, from £3.5m. We expect HERC to report 2023 fiscal year results in January 2024. Our DCF valuation remains £0.80/shr (15% WACC;3.5% TG).
Outlook: Hercules has delivered on its growth expectations with average annual revenue growth of 50% over the last 3 years. We expect continued strong future performance within each of its divisions augmented by new revenue streams from the Training Academy and expanded specialties in Labour Supply, making this an attractive investment opportunity for investors particularly at current valuations.
