SMALL CAP IDEA: Hercules Site Services eyes infrastructure push amid labour shortfall

Britain is at a crossroads when it comes to major infrastructure upgrades.

Indeed, as Hinkley Point C and Sizewell C continue to be built, a new fleet of small modular reactors (SMRs) is among a score of projects promised for the coming decades.

HS2 has also consistently appeared in the spotlight, with reports most recently suggesting Britain’s new government is mulling an ‘HS2 lite’ replacement for the scrapped northern link of the railway.

Water firms are on the verge of a new regulatory clampdown, which will bring in requirements from 2025 for hefty investments to fix ageing networks.

Come February this year, the UK already had a total of 660 projects in the pipeline across the private and public sectors, according to the Infrastructure and Projects Authority (IPA).

These collectively promised £700-£775billion worth of investment over the next decade, most of which relate to energy, followed by transport, social infrastructure and water.

Labour shortages threat

However, this wide range of projects will need an ever-growing skilled workforce, requiring between 543,000-600,000 people for the next two years alone, the IPA estimated.

This is as the construction industry grapples with growing labour shortages, the IPA said, leaving questions over where all these workers will come from.

So, it’s no surprise that Hercules Site Services, which offers training and labour supply, is on course for a record year.

AIM-listed Hercules earlier this month said full-year earnings would exceed market expectations with a 24 per cent increase in revenue to over £105million.

Hercules’ record year

From civil engineering and rail project labour, to white-collar jobs and even suction excavator hire, Hercules said it had continued to seize opportunities over the year, leaving the door open for ‘a lot to look forward to in 2025’.

‘It’s now widely accepted that the UK needs to upgrade many aspects of its infrastructure,’ said chief executive Brusk Korkmaz.

‘We recognise that in order to do this, it’s critical to have the right talent in place.’

The company officially opened its Hercules Construction Academy in the West Midlands in January to support the development of such talent.

While key to addressing the UK’s labour shortage, it would also offer Hercules a pipeline of workers to deploy across its growing portfolio of projects, Korkmaz pointed out.

Growing portfolio of major work

Hercules already provides labour for major projects including Sizewell C and HS2.

The nuclear plant in Suffolk is expected to need workers for at least 20 years, for which Hercules is prepared, having recently opened an office in Saxmundham, near the site.

Some 600 Hercules workers currently staff the northern section of the first phase of the high-speed railway near Birmingham, with demand said to be growing week by week.

Hercules is also involved in other work for Network Rail, Transport for Wales and London Underground through a five-year deal with Balfour Beatty.

And this is before Ofwat’s new five-year regulatory framework in the water sector, AMP8, comes into force next year.

Upside ahead

Hercules’ involvement in high-profile projects hasn’t gone unnoticed, with news that 2024 will be a record year for the company prompting upgrades from brokers.

Dubbing the update as ‘excellent’, house broker Cavendish bumped Hercules’ share price target to 70p, forecasting a prospective 61 per cent gain at the time.

Analysts at investment research group Equity Development followed suit, raising its share price target from 60p to 70p.

‘The performance has been underpinned by Hercules’ own growth initiatives and an ability to respond to opportunities as they arise,’ Equity Development analysts said.

They also highlighted an £8million fundraising round by Hercules last month, placing it on course to further take advantage of merger and acquisition opportunities.

‘We… see scope for further outperformance as 2025 progresses, with M&A being an obvious potential earnings and share price catalyst,’ Equity Development added.

Opportunities ahead

That’s not to say Hercules’ is not already blessed with an abundant string of opportunities thanks to the expertise gained through the work it is already involved in.

In Korkmaz’s words: ‘Work is also ongoing with other companies as we become better known in the [rail] sector.’

Demand is expected to increase due to ‘well-documented issues within the water treatment sector’, he added.

Promises for a fleet of SMRs, alongside Sizewell C and Hinkley Point C, should also see Hercules in demand well into the next decade.

‘Like any infrastructure project, they will need a labour supply to build the SMRs,’ Korkmaz said.

‘We feel extremely well placed to help business and the government when the time is right.’

Shares have climbed 81.8 per cent so far this year to 44.55p. But as the analysts say, there may be further to travel for the stock.

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