Power Grid Upgrades And Skilled Labor Shortages Will Support Long Term Earnings Potential

Catalysts

About Hercules

Hercules plc is a technology enabled labor supply specialist serving blue chip clients across the U.K. infrastructure market.

What are the underlying business or industry changes driving this perspective?

• Escalating U.K. infrastructure and utility investment, including GBP 725 billion across core markets and GBP 104 billion for the new water investment cycle, is expected to drive sustained volume growth in labor demand and support continued revenue expansion.
• Acquisitions in power transmission, distribution and commissioning services position Hercules at the center of the long dated power grid upgrade program, increasing higher value project exposure and supporting structurally stronger earnings.
• The growing national shortage of skilled workers and Hercules Academy’s demonstrated ability to upskill and cross skill operatives should deepen pricing power and utilization, supporting margins and long term profit growth.
• Technology driven recruitment and onboarding apps that connect local labor to local projects at scale are improving fill rates and back office efficiency, which should enhance operating leverage and net margins as revenue grows.
• Geographic expansion into Scotland and early moves into international training opportunities such as Saudi giga projects broaden the addressable market, creating additional revenue streams and diversifying future earnings.

Assumptions

How have these above catalysts been quantified?

• Analysts are assuming Hercules's revenue will grow by 10.9% annually over the next 3 years.
• Analysts assume that profit margins will increase from 1.7% today to 4.0% in 3 years time.
• Analysts expect earnings to reach £6.0 million (and earnings per share of £0.08) by about December 2028, up from £1.8 million today.
• In order for the above numbers to justify the price target of the analysts, the company would need to trade at a PE ratio of 10.6x on those 2028 earnings, down from 18.0x today. This future PE is lower than the current PE for the GB Construction industry at 15.0x.
• Analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 10.06%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• A significant portion of forecast work depends on long duration, government backed infrastructure programs such as AMP 8, CP7 rail and nuclear projects where start dates, phasing and political support can shift, which could delay project mobilization, suppress labor demand at key times and reduce revenue growth.
• The strategy leans heavily on acquisitions like Advantage NRG and Lyons Power Services in emerging power grid and energy transition markets where the timing and scale of grid upgrade activity is uncertain, so slower than expected rollout or integration challenges could limit cross selling, dilute operating leverage and cap earnings expansion.
• The business model assumes a sustained and deep shortage of skilled labor in the U.K. to support pricing power and high utilization, yet a cyclical downturn, increased training capacity from competitors or looser immigration policy could ease this shortage over time, pressuring day rates, squeezing net margins and slowing profit growth.
• Rapid technology and systems change, including the new pay and bill and ERP platforms, recruitment and onboarding apps and Academy expansion, introduces execution and disruption risk, where implementation problems or cost overruns could erode efficiency gains, increase overhead and weigh on net margins during key growth years.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The analysts have a consensus price target of £0.6 for Hercules based on their expectations of its future earnings growth, profit margins and other risk factors.
  
• In order for you to agree with the analysts, you'd need to believe that by 2028, revenues will be £150.6 million, earnings will come to £6.0 million, and it would be trading on a PE ratio of 10.6x, assuming you use a discount rate of 10.1%.
  
• Given the current share price of £0.41, the analyst price target of £0.6 is 31.7% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.