Costain Group – After the hassles, recovery is now on the way

In just over three weeks, this technology-based engineering solutions group is going to be releasing its interim results for the six months to 30th June.

Once they are published, I believe that the market may well start the process to really reassess its potential going forward. It could also re-rate its shares too.

Capitalised at just £150m

The Costain Group (LON:COST) believes that it has the vision to become the UK’s leading smart infrastructure solutions company.

It is currently only capitalised at around £150m However, I consider that it could see that valuation doubled within the year or so.

It has had its ups and downs but it now appears to be well back into ‘recovery’ mode, which is why I feel that its shares have some strong investment attractions.

Over 156 years of history

We have all seen Costain’s hoardings around the country, its name is well known. After all it started some 156 years ago, by Richard Costain, a jobbing builder from the Isle of Man. It has since then been involved in notable engineering and construction projects across the UK and elsewhere in the world.

Its list of projects is endless – it was involved in the Karibe Township in Zimbabwe, the Thames Barrier, the Hong Kong cross-harbour tunnel, the Dubai International Airport, Dolphin Square, the Channel Tunnel, Murrayfield Stadium, Westfield Mine, the A26, Trident Floating Dock, the Bidston Moss Viaduct, the Zimbabwe Reserve Bank, the Aldersgate Offices, Crossrail, St Pancras Station, St Martin-in-the Fields, Stublach Gas Storage, the M25, Walton Bridge, Peacehaven, and hundreds more.

The group was floated in 1933, when its capital was just £600,000.

Way back in 1988 the group’s shares were trading at the equivalent of £216 a share, but a lot of water has flowed under and around it since then.

But now with its visionary strategy in play it has spread its ‘solutions’ across several disciplines and into a multitude of customer sectors.

Corporate culture

Its corporate culture is to ‘help to improve people’s lives’ with integrated, leading edge, smart infrastructure solutions to its ‘blue chip’ clients in various UK markets, such as energy, defence, transportation and water.

With over 3000 employees, the group, which has its head office in Maidenhead, is split into two main divisions – Transportation, and Natural Resources.

The Transportation segment operates in the highways, rail, and aviation markets.

The Natural Resources segment operates in the water, energy, and defence markets.

It offers future shaping strategic consultancy, consultancy and advisory, digital technology, asset optimisation, and complex program delivery solutions and services. 

In its focus upon improving people’s lives, it connects and keeps the nation moving (transportation), it keeps water clean and flowing (water), it powers communities sustainably (energy) and it helps to keep the nation safe (defence).

Massive client list

Its client list is long, ‘top name’ and major project focussed.

Apart from several UK Government projects in which it is involved, the group is also currently has work on hand with the Devonport Royal Dockyard, Yorkshire Water, Network Rail, Highways England, East Sussex County Council, Transport for London, Anglian Water, Crown Commercial Services, Project MENSA, Cadent, United Utilities, Sellafield, HS2, Dreadnought Alliance, Lancashire County Council, INEOS, Bradford Council, AMP7 Frameworks, Thames Tideway, EDF, the South Wales Industrial Cluster, South Staffs Water, and several others.

Massive order book

As at the end of June, the group had an order book worth some £4bn of which £1.2bn was secured for 2021.

Lot of cash

It has a net cash position of £113m, that is the equivalent of 75% of its current market worth – which is some 41p per share.

Excellent professional holders list

The group has some 275m shares in issue.

Institutional holders include JO Hambro Capital Management (9.91%), Ennismore Fund Management (7.10%), Hargreaves Lansdown Stockbrokers (6.16%), Gresham House Asset Management (5.46%), Northern Trust Global Investments (3.82%), Artemis Investment Management (3.08%), Hargreaves Lansdown Asset Management (3.01%), KBI Global Investors (2.74%), and Jupiter Asset Management (1.61%).

Latest Trading Update

In the middle of July, the group issued its Half Year Trading Update for the six months to end June.

The group stated that it had continued to operate productively with effective safety measures in place across all of its contracts. Apart from its cash position being better than had been expected it also made comment about the current trading.

“We have continued to secure new contracts in line with our strategic ambitions. This continued progress underpins our confidence in delivering further growth in profits this year, in line with the Board’s expectations.”

Broker’s estimates

Analyst Joe Brent, at the group’s brokers Liberum Capital, has estimated that sales for the current year to end December at £1.08bn (£1.07bn).

However, he is looking for pre-tax profits to almost double at £26.8m (£13.9m), with earnings increasing from 5.75p to 8p per share.

For 2022 and 2023 he sees revenues of £1.12bn and £1.16bn and with profits of £33m and £42.5m respectively.

Brent has pencilled in earnings of 9.8p then 11.82p and dividends of 3.27p and then 3.94p per share.

Attractive investment features

The group’s current cash position, which is very strong, combined with its order books going forward, and the strength of its customer list – all are attractive features.

It has an importance within the very nucleus of the UK moving ahead as it comes out of the pandemic.

The group has bettered itself over the last year or so and now looks very ready to be reassessed within its sector.

Just three years ago the group’s shares were trading at around 460p, some nine times higher than the current share price. That was before it was beset with a number of corporate hassles, but the group has now extricated itself from them.

My View

I consider that its shares trading at just 6.8 times current year earnings, 5.6 times next year’s and a mere 4.6 times 2023’s estimates are wrongly priced by the market.

Brent rates the group’s shares as a ‘buy’ looking for 80p.

I have been wrong on this group before, catching it just before all hell broke loose.

I really can see excellent value in its shares, which are now trading at just 54p.

Even though I consider that the group’s value could well double within the next year or so, I now modestly set my Target Price at 69p.

(Profile 05.09.19 @ 151p set a Target Price of 250p)