Hercules Site Services plc (LON:HERC), a leading technology enabled labour supply company for the UK infrastructure sector, has announced its audited results for the year ended 30 September 2023.
Financial Highlights
· Growth across all areas of the business and results exceeding market expectations
· Revenues increased 71% to a record £84.7m (2022: £49.5m)
· Gross profit increased 67% to £16.3m (2022: £9.8m)
· Adjusted EBITDA* increased 79% to a record £4.1m (2022: £2.3m)
· Pre-tax profit of £641,321 (2022: £160,685)
· EPS increased to 1.27p (2022: 0.58p) – increase of 119%
· Cash at year end of £4.2m (2022: £1.2m)
· Proposed final dividend of 1.12p per share (2022: 1.12p)
*Adjusted EBITDA excludes research and development, share based payments, profit/(loss) on sale of assets and exceptional items
Operational Highlights
· Labour supply operatives have increased to over 1,000 (2022: 750) over the period
· Labour supply to HS2 (Birmingham section) increased to c.425 operatives (2022: 280)
· App downloads (Recruitment and Onboarding) increased to c.12,000 (2022: 8,100)
· New client wins include Balfour Beatty Rail, Galliford Try PSL and Octavius
· Agreed a five-year contract with Balfour Beatty Rail through Hercules’ new “live tracks” rail offering
· New contract wins with Thames and Anglian Water, numerous contracts completed within the year
· Post year end, the Company completed its first acquisition, Future Build Recruitment Limited, expanding Hercules’ exposure to the white-collar construction market
· Construction of Hercules’ training Academy has been completed, ready for launch in January 2024
Outlook
The Board and the Company’s wider senior management team remain committed to Hercules’ growth strategy and the business has a strong pipeline of projects heading into 2024. Hercules is now well positioned to take advantage of secular trends in both the infrastructure and construction sectors. Management will continue to pursue a disciplined approach to M&A to help further accelerate the growth of the Company. The launch of Hercules’ training academy in 2024 will help future-proof the business and expand upskilling opportunities, as the Company continues to strengthen relationships throughout the construction and infrastructure industries.
Brusk Korkmaz, Hercules Site Services Chief Executive Officer, commented:
“2023 was a truly transformative year for Hercules. We saw significant growth across all areas of our business and we are delighted to have exceeded market expectations and achieved record revenue and EBITDA figures.
“As the infrastructure and construction sectors continued to face labour supply and skills shortages, we were able to deliver for our clients, including a range of blue-chip companies including Galliford Try, Balfour Beatty, Costain and Vinci. During the year, we also agreed a five-year contract with Balfour Beatty alongside numerous new contracts with both Thames and Anglian Water. The addition of these new contracts has further accelerated growth within both our Labour Supply and Construction Services divisions.
“With our digital edge (total app downloads have now reached 12,000), our new training academy and our recent acquisition of Future Build, Hercules is increasingly well prepared for the future and continues to ingrain itself into the heart of the UK infrastructure and construction market.”
CHAIRMAN’S REPORT FOR THE YEAR ENDED 30 SEPTEMBER 2023
Hercules has had another very busy and successful year with revenue increasing by 71% and we are also pleased to report that we have surpassed market expectations.
We are delighted with this result, particularly given that this is the first set of full year results that cover an entire 12 months as an AIM listed company. I would like to thank our original investors, those who took part in our fundraise in the spring of last year and our other investors for their support. We are anticipating another busy financial year ahead with exciting opportunities and initiatives for the company to focus on.
We have achieved growth across all areas of our business, which is testament to the strong demand for our suite of services. Cross-selling between all our business units has continued to be a feature, demonstrating the complementary and integrated nature of our offering.
Strong market dynamics
The UK has been living with high inflation and interest rates for a good period of time now, but pleasingly the infrastructure sector is still forging ahead. Access to labour continues to be a core priority for the industry and we have built an excellent reputation as a tier 1 provider due to our technological edge and our experienced management team.
With our Balfour Beatty Rail contract win in 2023, and Network Rail’s CP7 investment plans, representing a £44bn investment into the rail network from April 2024 across 5 years through to 2029, we are well placed to significantly grow our presence in the Rail labour market. In addition, National Highways strategic business plan set aside £14.2bn for road enhancement schemes between 2020 – 2025.
The Water Industry delivers work in 5-year cycles called AMP (Asset Management Plan) periods where budgets are pre-agreed with Ofwat (Office of Water Services Regulation Authority). AMP 7 (2020 – 2025) had a slow start due to Covid and the work is now continuing at an increased pace to cope with growth demands and to meet legislative requirements. AMP 8 (2025-2030) is planned to be an even greater period of investment (almost double AMP 7) with the industry expecting a step change in performance to clean rivers and coastlines and to meet the challenges of climate change.
Hercules will continue to benefit from significant investment in government-backed infrastructure spending. The result of which means that the cancellation of HS2 (Manchester section) has had no impact to our existing contracts and our outlook for 2024 and beyond continues to look positive.
Inflation pressures affected the business in FY22, particularly pay levels, but in FY23 the pressures have reduced, and we have continued to demonstrate our ability to regularly renegotiate increased pay levels with our clients.
Dividend
The Board is pleased to propose a final dividend of 1.12 pence per share (2022: 1.12 pence). The dividend will be paid on 22 March 2024 to shareholders on the register at close of business on 23 February 2024. The shares will go ex-dividend on 22 February 2024.Brusk Korkmaz, CEO, via his company Hercules Real Estate Ltd, took the interim dividend in August 2023 and will be taking the final dividend as well. This is the first year he has taken a dividend since the IPO.
Outlook
After a year of significant growth, the outlook for Hercules remains very positive. Revenue growth has averaged 55% over the last three years, and while the Directors don’t expect such high levels of organic growth to continue, our pipeline for 2024 looks robust across all our business units and we have experienced positive trading across all areas for the first three months of our current financial year.
We entered the 2024 financial year with additional financial firepower, having secured a new debt facility with IGF Business Credit Limited. The three-year invoice discounting debt facility for up to £15m will fund our continued organic growth and ongoing working capital needs. We believe that this increased funding capacity will provide the headroom required to support continued growth.
We continue to develop new revenue streams which will come to the fore in FY 2024. We will be very shortly launching our Training Academy, which will also secure and enhance our supply chain of highly trained employees, and our new “live track” rail offering is expected to continue building steam.
Post period end, Hercules began to implement its acquisition strategy, acquiring 60% of Future Build Recruitment Ltd (“Future Build”) in November 2023, a profitable specialist white-collar recruitment company operating in the UK construction sector. Having tested the market opportunity in white-collar recruitment through organic growth initiatives, this deal expands our footprint in the white-collar recruitment market by bringing a highly regarded business and team into the Company. It also provides an array of compelling cross-selling opportunities.
With respect to further potential acquisitions, and partnership arrangements, we are progressing positively with a number of discussions and we look forward to updating the market at the appropriate time.
Once again, I would like to thank our shareholders and advisers for their support during the year, and the Hercules team for continuing to successfully deliver a range of operational growth milestones.
Henry Pitman, Non-executive Chairman
Date: 12.01.2024
CHIEF EXECUTIVE OFFICER’S REVIEW FOR THE YEAR ENDED 30 SEPTEMBER 2023
To have exceeded the market’s expectations against the backdrop of a year of high inflation and interest rates is an extraordinary achievement.
Revenue has increased by 71% year on year to £84.7m (2022: £49.5m) and Adjusted EBITDA for the year was well above market expectations at £4.1m (2022: £2.3m), representing growth of 79%.
Revenue growth was accompanied by strong cash conversion and effective credit management.Net cash generated from operations during the year was £3.8m compared with cash absorbed of £5.3m in FY22.
This has been achieved through growth across all areas of our business: Labour Supply and Construction Services. Hercules offers a “one stop shop” service to contractors within the UK infrastructure sector and our complementary suite of services enables us to cross-sell and create strong relationships with blue chip companies. This takes determination and coordination across our talented teams and given the challenges that all businesses have had to navigate this year, the entire Hercules team have shown incredible hard work and dedication throughout the year, and for that they have my sincere thanks.
On top of this, we have also built foundations for future growth and recurring revenue. We completed our first acquisition post period end, in November 2023, providing us with exposure to the growing white-collar and permanent recruitment market, and we have made excellent progress towards launching our Training Academy, which will open its doors imminently.
The infrastructure and construction sectors are experiencing continued buoyancy providing a supportive backdrop for our growth, and recent research demonstrates that this is continuing post period end.
Given the labour shortages experienced by the sector, and the effectiveness of our digital tools in placing operatives on projects, we are well placed to benefit from this growth in the months and years ahead. Demand for our range of complementary services has been strong and our pipeline is very robust. Although there is a possibility of a change of government in the UK during this year, we do not have any reason to believe there will be any significant change in infrastructure investment in the next few years.
Labour Supply
Labour Supply is our core business and we have a strong track record of working in partnership with blue chip construction companies to deliver key infrastructure, civil engineering, utilities, groundworks, highway and railway projects. It represented 75% of Hercules’ revenue for the year ended 30 September 2023 (FY 2022: 67%).
This is our second year working with the Beatty Vinci JV on the HS2 (Birmingham section). This is our largest ever contract and the Company is now playing a huge part in the delivery of one of modern history’s greatest legacy projects. We are the leading labour supplier on the six-supplier labour desk, now with circa 425 operatives on site. This growth is expected to continue for the next 5-7 years with FY2024 requirements expected to be greater than those in 2023.
Our strong, blue chip client base continues to provide repeat business for Hercules and during the period these relationships have delivered contracts such as the A47 with Galliford Try and the A428 with Skanska. In the last 12 months, on average, the Company has been supplying between 625 and 980 personnel to projects each day (average of around 850), which is up year on year by circa 77%. We have won new contracts for NEAR (National Emergency Areas Retrofit) schemes on the M25, M4 and M3 and we also continue to supply labour for RDP (regional development programme) projects including the A12, A30 and A63.
Relationships built with our clients have been the cornerstone of the Company’s success. These clients have either won or are bidding for major projects such as Net Zero Teesside, Sizewell C, Heathrow Expansion and various national rail frameworks.
As per the contracts referenced above, we have traditionally supplied blue collar personnel and have been successful in doing so due to our innovative mobile recruitment and onboarding apps which ensure that we supply the right person to the right location on time to fulfil client requirements. We have built upon this strong track record by expanding into white-collar and security recruitment. The success of our organic growth in the white-collar space motivated us to focus on this area, and post period end, we acquired specialist white-collar recruitment company Future Build. With minimal overlap between clients, the acquisition will enhance the service offering we are able to provide our existing customer base, while Hercules’ current offering will provide complementary services to Future Build clients.
A third new revenue stream has also been added through the launch of our “live tracks” Rail offering, which kicked-off with a five-year contract with Balfour Beatty Rail Limited. The Board of Hercules is confident that these new services will drive additional revenue and EBITDA moving forward.
Our technology gives us a strong competitive edge, enabling us to quickly meet our clients’ labour needs and to source local labour, which often is a stipulation in government-funded projects. Indeed, our ‘Hercules Construction Jobs’ recruitment app, launched in October 2019, has more than 11,500 downloads and more than 6,250 registered users at the time of writing (FY 2022: 8,100 and 4,700 respectively).
I am pleased to report that we have a healthy pipeline which extends beyond 2024, so we look forward to delivering further growth in our Labour Supply business.
Construction Services
Specialist Plant Services
Since Hercules commenced business in this space, growth of our suction excavator business has been impressive. We almost doubled the size of our fleet to 30 vehicles during the year (post year end we sold the two oldest suction excavators), which saw revenue from this division rise to £4.9m (2022: £3.6m). During the period, this business unit accounted for 6% (2022: 7%) of total revenue. The 14 new vehicles acquired during the period were all delivered in time for Hercules to benefit from the government’s super deduction tax relief scheme, before it expired.
As part of this expansion, we now have our first three Triple Fan Excavators, providing extra capability for our clients, as these units can work at distance above the 70m efficient limit of the twin fan. In addition to this, we now offer a custom tracked satellite unit to offer our clients. These remote units are a vital piece of equipment to work in locations where the main truck unit cannot get to.
Utilisation of vehicles is key to this division and following the delivery of the vehicles in March 2023 this reduced temporarily from its previous high position (averaging 85%) to circa 66%. A key challenge has and will no doubt continue to be the availability of suitable operators. However, the team has worked well on business development, developed a new approach to recruitment which is working well, and utilisation is already back up to circa 75% and rising. We have delivered an increase in the client base during the year, with Amey, Keltbray, RSK and Tideway are now all working with our Specialist Plant Services division. We have also increased utilisation through a number of existing clients, including M&J Evans, Anglian Water, Costain, Skanska, Milestone, Tilbury Douglas and Kier.
Hercules developed the ‘Zero-Trim’ piles method, which uses a vacuum excavator to suck out excess concrete from a concrete pile while still wet. We successfully trialled this for the Balfour Beatty Vinci JV on HS2 (Birmingham section), and now have a significant programme of piling work upcoming in 2024.
Civil Projects
Hercules’ Civil Projects division partners with some of the UK’s top contractors to provide end-to-end project delivery for civil engineering contracts. Turnover for Civil Projects grew to £15.6m (2022: £12.4m), accounting for approximately 18% of company revenue for the year ended 30 September 2023 (2022: 25%).
With the water industry facing enormous challenges, as has been well documented in the media, our Civil Projects team has leveraged its experience in this space to win significant levels of repeat work, mainly for key delivery partners for AMP7 (Asset Management Programme 7). The Anglian Water Civils Framework gained momentum, with some sizeable projects being allocated to Hercules. Six of these schemes were completed in the year. Activity levels remained high this year, with an increase in size of project having a positive impact on the turnover. Eight projects with a value over £1m were started or completed at various sites for clients such as Galliford Try, Mott Macdonald Bentley and the @one Alliance. In addition to this, the division also completed two projects in the gas industry for TGE and SGN.
Additional site management staff were recruited to supplement the existing teams to cover the larger, more complex projects. The division operated with an average of 150 operatives across all their sites, the largest number to date. They work closely with the Labour Supply division to cope with variances in workload.
This year the Civils team also introduced a Hercules Suction Excavator into its equipment fleet. This provides the Civils team with access to this extremely useful equipment for use across all of its projects and having it available full time has promoted its use on some sites and is an added benefit for our clients.
Additional growth initiatives
Hercules provides a range of services for its clients, which increases the total value of the Company to the client and provides the business with a diversified range of revenue streams.
Hercules Digital
We have a licence agreement regarding the SEE (Skills, Education and Employment) Everything Portal’s full implementation and use at the Old Oak Common regeneration project in west London. We are hoping to expand this further in 2024, as we believe we are well positioned to progress a pipeline of licensing opportunities across the public and private sectors in the years to come.
Training Academy
The Company leased an industrial site in Nuneaton (West Midlands, circa 15 miles from the HS2 (Birmingham section) in August 2022 from Hercules Real Estate Limited (“HRE”). Since then we have been executing plans so that this site can house Hercules’ first Training Academy. Following a period of development and refurbishment the Academy is now operational and a new lease agreement has been entered into with HRE.
The training academy has been built on the foundations of our business and values to provide the very best services to the construction industry. As the skills shortages throughout the UK continue to rise, our academy has been established to address them and to provide a solution to attract new talent and upskill the current workforce. By providing excellent facilities, in a strategic location, the Academy will not only serve the Hercules workforce (and thus reduce external training costs) but will also deliver specific training for clients across the infrastructure and construction industries. The Academy will deliver training to all of the existing Hercules clients, as well as new clients who are currently not using our other services.
Our Training Academy will deliver a diverse range of accredited courses that cater to aspiring professionals and industry personnel alike. It will provide specialised technical training in areas such as plant operation, health and safety, utilities and other bespoke courses. The facilities replicate the modern construction site giving learners a safe environment to train and qualify to be site ready. As well as short duration courses, the Academy will run and manage NVQ assessments and apprenticeships. Providing apprenticeships will allow us to assist the wider Hercules client base meet their commitments in this regard and our facility will help attract new talent to the industry. A further strategy is to work closely with local authorities and central government to obtain funding for the delivery of training of new entrants to the construction industry, with a focus on skills bootcamps and upskilling.
With further areas for development available at the site, the Academy facilities have an opportunity to grow and evolve as the industry develops and introduces further use of technology. This will allow Hercules to continually upskill its current workforce for the future.
The official opening of the Academy is planned for 31st January 2024.
Health Trailer
In the last twelve months the Hercules Health Screening Trailer has been provided to clients including Skanska, Balfour Beatty, Galliford Try, Blackwell Earthmoving, Taylor Woodrow and Hitachi Energy. Nurses can be provided to carry out health and wellbeing screening to the workforce on site. Depending on the client requirements, the trailer can also be utilised to provide safety critical medicals, drug and alcohol testing, and deliver flu jabs. With repeat bookings already secured for FY2024, the medical trailer is set for another busy year.
Creating positive social value
Apart from our core business, we continue to help deliver positive social value outcomes in and around our clients’ projects often working collaboratively to achieve the best results. The culture at Hercules is one which is very much centred around teamwork and we are all guided by our Core Values and Mission Statement, dedicated to delivering a world class service to our clients, workforce and now our investors.
Our team strives to encourage the next generation into our industry, so engagements in schools and further education colleges are vitally important. We also endeavour to source candidates from diverse channels such as ex-military, ex-offenders, BAME and other hard to reach communities. Our success with hiring from the ex-military community has been rewarded with the coveted ERS MOD Gold Award.
Additionally, our ownership of a bespoke, fully equipped mobile health screening trailer, enhances our commitment to employee wellbeing, in an industry which has high mental and physical health challenges.
The trailer has been deployed to provide a range of medical services, including vision and hearing tests, safety critical medicals, heart and blood pressure testing and lung function testing to on-site operatives. The medical screening facility also provides mental health awareness support, discreet monitoring of modern slavery related issues and a platform for raising awareness of health, safety and wellbeing issues to workers.
The health screening trailer provides a number of advantages to site workers, including faster turnaround for medical certificates, increased awareness of health and safety matters, reduction in downtime away from sites for General Practitioner visits and reduced carbon emissions.
Outlook
We enter 2024 with an excellent foundation for further growth, having exceeded market expectations and developed an array of accretive commercial workstreams which will expand our business and deliver additional revenue and profits.
The first quarter of FY 2024 has been successful, with our first acquisition completed and strong pipeline of new business across our divisions, and the outlook for the infrastructure sector remains buoyant.
As well as driving our core business, we will advance some exciting new avenues, such as our Hercules Training Academy, our rail, white collar and site security divisions and other acquisition and new business opportunities, to complement the organic growth we continue to achieve.
As we move through and beyond the next reporting period, we will maintain that growth mindset which has served us well over the past 16 years.
Brusk Korkmaz, Chief Executive Officer
Date: 12.01.2024
Nuneaton Lease Agreement – Related Party Transaction
As referenced in the Chief Executive Officer’s Review, the Company has entered into a new 15-year lease agreement (“New Lease”) for the Hercules Training Academy site in Nuneaton. The New Lease replaces the original lease agreement, details of which were notified on 31 August 2022. Under the terms of the New Lease, the new rent payable by the Company is £160,107 per annum commencing on 1 February 2024.
The terms of the New Lease reflect the development and refurbishment of the site by Hercules Real Estate Limited (“HRE”), a substantial shareholder and related party of the Company. Brusk Korkmaz, the Company’s Chief Executive Officer, is a director of HRE and the majority shareholder.
The New Lease is being treated as a related party transaction for the purposes of Rule 13 of the AIM Rules for Companies. The directors independent of the New Lease (being all directors except Brusk Korkmaz) consider, having consulted with SP Angel Corporate Finance LLP, the Company’s Nominated Adviser, that the terms of the New Lease are fair and reasonable in so far as Hercules Site Services’ shareholders are concerned.
