Costain Group Is Looking Far Too Cheaply Rated

It is not the latest Trading Update that inspires to push the shares of Costain Group (LON:COST) the construction and support services business.

Instead, it is the incredibly low price-to earnings ratio of its shares.

Normally investors would dismiss such low p.e. stocks because they would have an instant view that the rating is a foreboding of poor times to come.

But not so in the case of this smart infrastructure solutions provider to the UK transportation, energy, water, and the defence markets.

The Business

The Maidenhead, Berkshire-based group has a description out for its business stating that it helps to improve people’s lives by creating connected, sustainable infrastructure that enables people and the planet to thrive.

It shapes, creates and delivers pioneering solutions that transform the performance of the infrastructure ecosystem across the UK’s transport, energy, water, and defence markets.

The 158-year old group, which has some 3,500 employees, is organised around its customers anticipating and solving their challenges and helping to improve performance, by bringing together its unique mix of construction, consulting and digital experts the company engineers and delivers sustainable, efficient and practical solutions.

The company operates through two segments, Transportation and Natural Resources.

The Transportation segment operates in the road, rail, and integrated transport markets. (73.6% of 2022 sales)

The Natural Resources segment operates in the water, energy, and defense markets. (26.4% of 2022 sales)

It offers consultancy and advisory, digital technology, climate change, and complex program delivery solutions and services.

Recent Financing Facilities Agreement

In late July the £148m capitalised company announced that it had successfully concluded negotiations with its bank and surety facility providers to refinance a new three-year agreement of its bank and bonding facilities. 

The new facilities agreement to September 2026 comprises an £85m sustainability-linked revolving credit facility, and surety and bank bonding facilities totalling £270m, with the reduction in facilities reflecting the group’s positive cash generation and cash position. 

The Interim Results

Yesterday the group reported its results for the six months to end June showing almost standstill revenues at £664.4m (£665.2m), while the adjusted pre-tax profit of £15.9m was a massive uplift from the previous year’s first half loss of £7.4m.

Even the Interim earnings were impressive at 4.4p per share.

The company’s performance in the first half demonstrates the strength and resilience of its business, with an increase in adjusted operating profit supported by the robust growth in Natural Resources, resilience in Transportation and continued positive cash generation.

Management Comment

CEO Alex Vaughan stated that:

“There remains a positive outlook across our markets, while recognising the short-term rephasing of the government’s transport spending.

We expect that the sectoral growth we have seen in Natural Resources, together with the rephasing and rescoping of some infrastructure projects in Rail and Road to continue for the remainder of the year and into 2024.

While we are mindful of the macro-economic backdrop, recognising the timing of customer procurement cycles, the quality of our secured and preferred bidder work gives us good visibility on future revenue, with more than 90% of revenue secured for the remainder of 2023.

Our expectations for 2023 remain unchanged and we continue to be confident in the Group’s long-term prospects.”

The Equity

There are some 277m shares in issue.

The larger holders include ASGC Construction (15.06%), Ennismore Fund management (6.74%), JO Hambros Capital Management (6.66%), Gresham House Asset Management (5.43%), KBI Global Investors (4.59%), FIL Investment Advisors (2.96%), Hargreaves Lansdown Asset Management (2.74%), Amundi Asset Management (2.64%) and Artemis Investment Management (1.95%).

Brokers’ Views – Buy With A Target Price Of 80p

Analyst Joe Brent at Liberum Capital is very bullish about the group, its low rating and its future prospects.

For the current year to end December he has estimates out for a slight dip in sales to £1.37bn (£1.42bn), while he has an increased pre-tax profit figure of £41.0m (£34.2m), lifting earnings up to 11.30p (9.83p) per share. He even sees a 1.13p per share dividend this year against nil previously.

For next year he has £1.25bn sales, £45.0m profits, 12.12p earnings and a 1.21p dividend.

Jumping ahead for the year to end December 2025 Brent has forecasts of £1.29bn revenues, £49.8m profits, 13.39p earnings and a 1.34p dividend.

Brent is predicting net cash at the 2023-year end of £135m (£124m), then £165m in 2024 and £183m in 2025.

Based on those estimates it is understandable why the analyst has such a strong 80p price objective for the shares.

Across a consensus of four analysts who follow the company the Average Target Price is 73p for the shares, with the Highest Price Target being 102p.

My View – A Price Of 62p Looks Achievable

The group’s Order Book at end June was a massive £2.5bn, with followers expecting some big order advances in the second half year.

Even though I have previously set two Target prices for this group’s shares, with neither of them performing satisfactorily, I still persist in stating that I really feel that this group’s shares are ridiculously low in rating and value.

In fact, I feel that they are too low to be ignored by any investor looking for the UK to correct its economy and its infrastructure too.

Buying Costain shares, at 50p, puts them out on just 4.4 times pe ratio for 2023 and a mere 4.1 times the 2024 estimate.

A correction in price back up to the 62p achieved in late April this year, looks more than achievable.

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

(Profile 02.08.21 @ 55p set a Target Price of 69p)