Small Cap Catch-Up: Do Building Services Offer Value?

Hercules Site Services (LON:HERC) – ‘Buying Business’?

Yesterday morning’s Trading Update for the year to end September by this labour supply company suggested that its results would be ahead of market expectations.

Revenues could well come in at over £80m as opposed to the market hopes of £73m or so.

That would be an advance of 60% over last years £49.5m, which would show an average annual revenue growth of an impressive 50% plus.

The company reported that each of its three main divisions delivered organic growth in revenues.

CEO Brusk Korkmaz stated that:

“All areas of our business have experienced substantial growth during the period, and we are observing significant opportunities for the year ahead.

Our Training Academy in Nuneaton is expected to soft launch in November before its official opening early next year, thereby providing an additional revenue stream in 2024 and helping address a skills shortage in the infrastructure industry and wider economy.

Further new revenue streams will also be delivered through our new Labour Supply specialisms, which are well aligned with industry trends.

For our Civils business, we are working with our clients in the water space to upgrade sewage and water treatment works.

We have delivered a strong financial performance and progressed a range of strategic initiatives, which positions us well for the year ahead as the infrastructure sector grows from strength to strength.”

Analyst Andrew Gibb at Cavendish Capital obviously rates the company as having much to go for, with a Price Objective more than double the current price at 55p.

His estimates for the year just ended are for £80.2m sales but with adjusted pre-tax profits at £0.4m (£0.7m), although earnings he expects to be 1.6p (1.5p) while paying out a 1.7p per share dividend.

For the current year he sees £81.9m revenues, trebled profits to £1.2m, lifting earnings to 1.9p and covering a 1.8p dividend.

Jumping forward to 2025 his figures show out at £88.2m sales, £2.2m profits, 2.6p earnings and a 1.9p dividend.

Over at Equity Development analysts James Tetley and Andy Edmond have a Fair Value of 60p on the shares, aiming for estimates fairly close to Cavendish.

At the infrastructure group’s broker and Nomad, SP Angel, their analyst John Meyer is bold enough to put out a Discounted Cash Flow valuation of 80p a share.

Meyer is looking for continued strong future performance from its three main divisions, aided by its Training Academy revenues streams, rating the shares as an attractive investment opportunity at current valuations.

The £17.5m capitalised group is considered to be well-placed to benefit from any government increase in infrastructure spending, while its experienced management team has identified multiple opportunities for growth.

Earlier this year the group’s shares were ‘spoofed’ up to 73p ahead of a fund-raising issue.

Last night they closed at 27p, up 1.5p on the day, on the back of a heavy dealing volume in the stock.

A week ago, I stated that I have previously considered that the shares had attractions – looking at the above estimates I still have some doubts as to their value, at least until the company clearly shows that it is not ‘buying business’ and that it will reduce its dividend to earnings ratio.

(Profile 04.05.22 @ 52p set a Target Price of 64p*)

Kinovo (LON:KINO) – Interims Due Shortly Will Show The Undervalue

This support services group provides specialist mechanical, electrical and building services for local authorities and housing associations, including the social and affordable housing sector, as well as education and public buildings.

It also serves the private sector.

The group’s core services are built around ESG themes and centre on safety and regulatory compliance, regeneration, and the installation of energy efficient technologies.

Kinovo operates across London and the South-East of England and has recently begun to extend its footprint into the Midlands.

It employs over 220 staff, a significant proportion of whom hold relevant industry accreditations.

On a segmental basis the group’s revenues are split 45% in Electrical Services, 31% in Building Services and 24% in Mechanical Services.

On a revenue by service basis the group earns well from its Safety & Regulatory Compliance services some 56% of the total, 28% from Repair & Maintenance and 16% from its provision of Energy Efficient Solutions.

Local Councils contract some 50% of the group’s business, Social Housing accounts for 33%, while the Private Sector makes up the 17% balance.

Through its multi-year contracts, the group has a substantial revenue visibility, while it has long-term relationships with its clients.

The company has a cash-generative model and a strong balance sheet.

Recently the group’s major shareholder Tim Scott, through his Tipacs 2 Ltd vehicle, holding 29.58% of the KINO equity, made an approach for a tentative bid for the company at 56p a share.

The group’s Board firmly rejected his approach and denied him the ability to undertake due diligence ahead of such a bid.

He subsequently backed off and clearly stated that he was withdrawing his intention to make a firm offer.

Early next month we will see just how well the group is trading in the current year to end March 2024, when its reports its Interim Results.

Analyst James Wood at the group’s financial adviser, Nomad and Broker, Canaccord Genuity, has a speculative Buy out on the company’s shares, looking for them to get to 62p.

His estimates for the year are for sales of £72.0m (£62.7m), with adjusted pre-tax profits rising to £5.8m (£4.9m), lifting earnings to 6.9p (6.7p) per share.

For the year to end March 2025 Wood goes for £76.6m revenues, £6.3m profits, with 7.5p per share in earnings.

Now that Scott has shown his hand and backed off, he is locked away for some while as a bid competitor should any one of the voracious private equity groups decide to make a definite bid for the specialist property services group.

I consider that the shares of Kinovo are looking very attractive not only as a ‘straight-forward’ investment but also as a ‘takeover play’, certainly enough to inspire further investor interest going forward.

The shares closed last night at only 57p, which in my view clearly shows that they are heading a great deal higher than my Target Price, possibly to 70p plus.

(Profile 29.08.23 @ 49p set a Target Price of 62p*)

(Asterisks * denote that Target Prices have been achieved since Profile publication)