Engineer Costain is now concentrating upon a deployment of higher-margin services through a general leveraging of its existing strong client relationships together with its ability to deliver on complex programmes. Left trading in the doldrums after a profit warning, the shares are worth a look, writes Mark Watson-Mitchell.
You would have thought that the non-executive director Jacqueline de Rojas would have taken a pointer from the share sales of the Costain Group (LON:COST) chief executive and the finance director.
On 2 May she bought 1,201 shares at 332.78p each, when just a month earlier Andrew Wyllie, the CEO, and Anthony Bickerstaff, the FD, were big sellers of the shares at an average of 356p a share.
In May, after 15 years as CEO, Wyllie retired early, at the age of 59 ‘to take up other posts’. While Bickerstaff as FD knew exactly what was going on inside the company.
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Then in late June the company announced a shock profit warning. The shares fell from 305p to 174p that day, to later drift lower to 145p a couple of weeks ago.
So why am I telling you about these share dealings?
The answer is simple – to take advantage of what now looks to be an episode of overreaction, presenting investors with a great buying opportunity.
The Costain Group operates in the international engineering and construction sectors. It provides building and civil engineering and specialist processing services to its customers across the world.
Its operations take in the UK, Europe, the Middle East, the Pacific Rim, the Americas, Africa and Asia. Its clients are derived from within the construction, marine, retail, transport, resources, utilities and hotels sectors.
Today it has divided its business up into two core segments: natural resources and transportation.
It also has an entirely non-core activity, called Alcaidesa, which is in Spain. Costain owns operating assets of two golf courses with an associated parcel of land, and a 624-berth marina concession adjacent to Gibraltar. Last reported revenue was £3.0m (2018: £2.8m) with a £0.1m operating loss (2018: breakeven).
In Costain’s own words “We continue to review our options for this non-core asset.” Any offers? Just contact Anthony Bickerstaff.
But going back to the shock profit warning.
Despite winning significant contracts and handling increased business, the group was hit sideways by a £9.8m one-off charge on work that was completed for another contractor way back in 2006. That hit was coupled with contract start dates and cancellations.
It has, however, been winning new awards and the future looks really quite positive.
Alex Vaughan, the new in-house appointed CEO, has recently launched his ‘Leading Edge’ strategy for future development of the group’s business and the segmenting into two core businesses is just part of that strategy.
Two weeks ago, the group announced its results for the half year to end June. The results showed a fall in revenue from £759m to £594m while underlying operating profit fell from £23.2m to £21.2m.
Encouragingly, the company announced that its order book is strengthening through new awards and extensions of existing contracts, up from a total of £3.7bn to £4.2bn.
The company is now concentrating upon a deployment of higher-margin services through a general leveraging of its existing strong client relationships together with its ability to deliver on complex programmes.
The group was established way back in Liverpool in 1865. That was when 26-year old Richard Costain emigrated from the Isle of Man, to be joined by his brother-in-law, in seeking work as a jobbing builder and undertaker.
The group expanded such that by 1933 it was able to go public with a share capital of just £600,000. It has developed significantly over the following years.
Some examples of the projects the group has been involved with include: building the Hong Kong Airport platform; the Hong Kong cross harbour tunnel; the Dubai Dry Dock; Dolphin Square; the Channel Tunnel; the Orinoco River gas pipeline in Venezuela; the tallest building in Zimbabwe; the world’s largest floating dock for the MOD Trident; the Sri Lanka Victoria Dam power station; the restoration of St Pancras Station; the refurbishment of St Martins-in-the Fields Church in Trafalgar Square; and (for its sins) it has been acting as a buildability consultant on HS2.
A recently announced contract is for the £150m redevelopment of Gatwick Airport station.
For the balance of this year its order book is secured for another £0.5bn of business, while it already has £0.9bn secured for next year and for an impressive £2.8bn for 2021 and beyond. It is also the preferred bidder in some £0.6bn of further business.
The company currently has some 107,906,505 shares in issue, which values the group at around £163m. Its shares are held by a number of institutions, like: GLG Partners; Polar Capital; Ennismore Fund Management; Standard Life; and York Place. The Board, including Bickerstaff and former CEO Wyllie, still hold sizeable positions in the equity.
Brokers slashed their revenue and profit estimates for the current year after the warnings. They are now looking for £1.18bn of revenue in 2019, to produce £35.65m pre-tax profits, worth 26.79p of earnings, with a 10.66p dividend per share. For next year, £1.23bn of revenue could produce £40.96m of profits, giving 30.95p of earnings and a dividend of 12.08p per share.
Considering its forward order book, very strong balance sheet, extensive capabilities and very low market valuation, I rate these shares at 151p as an excellent purchase trading on a mere 5.6 times current year earnings and just 4.87 times prospective. My end-2020 target price is a recovery to trade at above the 250p level.
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