Costain Share Discussion Threads

[catabrit] 10/7/2023 22:21

Article today about cost delays on that A66 job that Costain walked away from. We’re unlikely to know exactly what happened but it’s clear there was risk in the scheme that the business didn’t wish to bear and that’s the sort of discipline we should all welcome and feel good about.

[chris magpie] 06/7/2023 17:33

Yes NR is mainly Consultancy and Water Projects. I truly hope this diverse model works they made a profit last year for the first time in 3 years and hopefully on better path the reduced pension contributions will as you say add to bottom line. Anyway will see when half year results are announced if model is really working overall profit margins should be on the increase. If more of business is really consultancy these higher margins should be coming through to the bottom line.

[catabrit] 06/7/2023 16:55

I’m not sure how true that is. Perhaps you know better than I do but based on the annual reports I’ve gone through (quite a few!), consulting comprises at least 1/3 of total staff and about the same in terms of operating profit. Pretty sure that all of natural resources is consulting-led for example.

And the plan is to get to a position where 50-55% of operating profit is consulting (hence the medium term margin targets they provided in March).

If you read the comments from recent senior hires (so last three years), many of the people joining state the same thing;

1). They like the mix of complex delivery, consulting and digital.

2). They like how inclusive Costain is vs peers. Go and look at Kier and Balfour and you’ll struggle to find the same amount of women in senior positions, likewise the composition of the board.

So for me, Costain is looking to future proof the business and skate to where the puck is going.

I’m fine with complex delivery provided it’s not fixed price contract-led and whilst I wasn’t sure what the situation was when I originally invested last year (I assumed they were more risk averse based on the transcripts etc), the confirmation of it in March really gave me a lot of confidence.

Galliford Try traded at a negative EV and my position size was tiny vs this because I felt Costain was safer, operationally.

Consulting is much higher margin and lower risk so would command a better multiple. If we had zero complex delivery and the same net cash and this was a pure play infra consulting biz, I reckon we’d be looking at a share price maybe 50-100% higher - even with the lower operating profit. I.e. we’d get more credit for our fortress balance sheet.

We get zero credit for it at the minute and I think that’s because people are still worried about nasty surprises from new contracts - despite assurances from management.

[chris magpie] 06/7/2023 12:04

Because none of them have ever contributed much to the bottom line from Cogap in past to more recent acquisitions like Promanex,Upstream and CITSL.

[catabrit] 05/7/2023 13:25

Hi Chris. That’s twice you’ve commented negatively on the consultancy business. No problems with that but I think you should add some colour as to why you don’t like it or don’t have much faith in it. Thanks.

[dickbush] 04/7/2023 14:34

That Pension Fund deal was very positive for shareholders. Just paying out what the company was due to pay the PF in 2023 before the change would release circa £4.6 mil for divis i.e. 1.67p in 2023. On the same basis, 2024 would see a divi of circa £6 mil i.e. 2.2p. If the company actually raises its operating margin towards 3.5% in 2024 (2.6% in 2022) the divi payout could be substantially better than that. And, as previously mentioned here, the probability of its acquisition must have gone up. I'm in.

[pinemartin9] 04/7/2023 11:41

For those interested, here are the details of the screens:

James O'Shaughnessy Tiny Titans is a small-cap momentum investing strategy set out by US fund manager James O'Shaughnessy in his 1996 book, What Works on Wall Street. It combines momentum and value factors and focuses on stocks capitalised at greater than £15m but less than £150m. Its key measures include the price to sales ratio and 1-year relative strength. O'Shaughnessy wrote: "Studies are nearly unanimous in their findings that small stocks (those in the lowest two deciles) do significantly better than large ones. We too have found tremendous returns from tiny stocks." He found that this strategy produced an annual compound return of 20.05% between 1963 and 2009. In 2012, O'Shaughnessy updated the strategy rules by replacing price-to-sales as the key value metric with 6 composited value factors.



The Magic Formula is a value investing strategy invented by the hedge fund manager Joel Greenblatt in the bestselling and highly recommended Little Book that Beats the Market. It focuses on finding quality value stocks using a blended ranking system (the Magic Formula rank) composed from two fundamental ratios: Return on Capital (which Greenblatt argues is the best determinant of whether a business is a good one) and Earnings Yield (his favoured measure for cheapness). He summarised his philosophy with the maxim "buying cheap stocks at bargain prices is the secret to making lots of money". In the fourth edition of his book Greenblatt claimed the top scoring portfolio of 30 stocks appreciated by 30.8% each year over the previous 17 years, though he stressed that the strategy could underperform during periods of up to two years. Having now sold hundreds of thousands of copies, the "Magic Formula" is credited for reinvigorating the practice of value investing.

[pinemartin9] 04/7/2023 11:27

Interesting, can you share the IC article at all?

On Stocko currently qualifies for 2 long screens and has good ratings all around. A stock rank of 98 is great! Momentum slipping due to recent drop in price, but that just increases the value.

COST qualifies for Greenblatt's Magic Formula(Quality Investing)
COST qualifies for Tiny Titans(Momentum Investing)

Quality 80, Value 97, Momentum 77, Stock Rank 98

Half year results August 23rd.

[catabrit] 04/7/2023 11:19

This is now being picked up by quantitative screening tools / strategies that focus on deep value. I saw an article on IC last night that included Costain in one of its screens.

I think that trend will accelerate this year as we get another set of clean accounts. Could help with price discovery, you never know.

[catabrit] 04/7/2023 09:39

I think the 11-yr ban given to the former CFO of Carillion is wonderful news for shareholders of Kier, Balfour, Costain etc. It’s a massive deterrent for sloppy reporting / bad behaviour.

[roguemale1] 04/7/2023 07:23

Hi Catabrit,
I wasn't meaning an RNS today or tomorrow re divi. You will recall the reply from investor relations a couple of months back that referred to pension review and RCF being sorted over the summer in time for the HYs in August. Those items will inform the divi conversation and heading in the right direction!
Rs

[catabrit] 03/7/2023 14:03

Couldn’t agree more on the volume point. I’m always dubious of a big rise on little volume vs daily average. I think it positions us well leading up to results day on August 23rd.

[pinemartin9] 03/7/2023 13:49

And accompanied by good volume last couple of trading days.

[bobaxe1] 03/7/2023 13:31

Glad to see the market is waking up to the potential value here

[pinemartin9] 03/7/2023 12:52

Yes, things have been turning round here for some time. Surely the value must unwind here before too long. It's been a long journey for me, currently 5% down on my holding. Purchases at 35p ish helped reduce my average. Seems relatively stable though. I have 15% of my pf in Costain so movements have a big impact on me.

All seems good here at the moment. Holding above 200 day MA which is still in uptrend.

[catabrit] 03/7/2023 12:47

Also, for what it’s worth, I think we own *by far* the most inclusive senior management team and executive board in U.K. listed construction / infrastructure. We get zero credit for it now but in time I think we will.

[casholaa] 03/7/2023 12:42

Well, I was thinking that Govt. could allow TW to go bust, take the infrastructure back into public ownership and start a bidding process subject to bidders developing the infrastructure to deal with sewage and leaks (or leeks for them in Wales).

[catabrit] 03/7/2023 12:25

I always liken investing to a game of snakes and ladders. And I honestly cannot think of an easier, safer ladder to climb than Costain at 47p odd. I don't know what the base rate is for buying things at net cash with optionality on profitable going concern value that has the potential to be 2-3x that net cash, but it must be bloody high i.e. there must be a good 70-90% statistical chance of making money.

I have been playing for a long time now and anytime I see this sort of set-up I get the bat out and swing hard. Obviously I could still be wrong but the odds are so favourable that it's worth it.

Let's see what happens. It's going to be a fun H2 I think.

[catabrit] 03/7/2023 11:53

I also think the new pension agreement removes an important impediment to this being acquired. If the shares continue to languish, I would expect Costain to be taken private or bought by a competitor / someone who wants UK infrastructure exposure. Especially considering that they also have no fixed price contracts on their books. It's hard to underwrite a pensions' settlement so now that it's done for the next couple of years, it becomes much easier to model. Likewise, a buyer would want comfort on fixed price contracts and Costain can now provide it. So then from a buyer's perspective, it becomes about the expertise they're buying and where that expertise sits from a competitive position vs peers considering the outlook for UK infrastructure spend across road, rail, water, energy and defence. That's much more palatable.

But the great thing here is that Alex et al have a huge amount of self-help optionality at their disposal. They could reduce the share count by 10-20% and that would be extremely accretive for the rest of us who then see our FCF yield per share go up by the same amount.

Use some of the net cash on the b/s to buy back stock at a depressed share price And voila, your annual FCF generation has 10-20% more purchasing power.

[catabrit] 03/7/2023 11:43

Nobody is going to be selling shares pre H1 results considering the probability of either;

1). dividends being reinstated
2). a buyback being announced
3). more contract wins

So - and I could be wrong - I think the bid has only one way to go; higher.

@ roguemale1 - you don't announce a dividend prematurely. I think there is more scope to announce a buyback early as that can be more accretive to intrinsic value depending on where the shares trade. If I was CEO, I would be using that cash pile to be buying back shares left, right and centre but that's because I'm more of a capital allocator, rather than an operator.

We just need to be patient. Summer is coming!

[casholaa] 03/7/2023 11:20

My short term view is that, even if valued at cash or thereabout, any additional profit-making contract should serve to provide an uplift to the share price There is potentially a whole load of projects that Cost could be involved in, but it's not worth entering into a contract only to bang one's head against a wall although I still think that they should bid to enhance their understanding of projects bid on.

[roguemale1] 03/7/2023 11:13

£7.5m is roughly half the cost of the the annual divi last 2 times it was paid, more than half prior.
Cmon Alex, RNS on reinstatement of Divi now please!

[sikhthetech] 30/6/2023 15:07

Thags,
"as much as Sikh the tech can be seen de-ramping he did have a point with costain."

Thanks.

I follow economic/political newsflow and see how they impact the sector. I also look at company/sector newsflow.

If the bull points can be countered then it makes the bear case stronger.
If the bear points can be countered then it makes the bull case stronger.

I'm negative on HBs and construction. The govn has a huge debt and interest the govn is paying has increased substantially. Taxes have risen as have energy prices.


My posting history on HBs is there to see.

Look at PSN/TW. I was saying 2 yrs ago that there's inflationary pressures and BoE will have to increase interest rates. 6 months before they actually started increasing them. A year ago when HBs and investors were bullish, my opinion was not to buy any HB due to affordability and my target on PSN was 1200p-1500p when the share price was around 2000p. The share price has fallen back due to the challenges I mentioned.


sikhthetech - 07 Jul 2022 - 16:22:15 - 2901 of 3086 PERSIMMON PLC - THE
I wouldn't buy any HB at the moment...
Affordability issues still mounting up with energy cap set to rise to around £3000 pa in Oct, inflationary pressures pushing up interest rates.

House prices slowing which happens before a crash..

<...>

[casholaa] 30/6/2023 11:06

Wow. Look's like they are now maximizing the strength of the balance sheet and more importantly, the company itself.