Costain Share Discussion Threads

[this_is_me] 23/8/2023 11:18

I bought the shares because they were seriously undervalued

If the BOD agree that the shares are seriously undervalued why would they not prioritise buybacks over dividends? Institutions can buy some more shares when the price has dropped and sell some when the price has risen. That is not economic for private investors like me so in the long term buybacks when the price has fallen helps me grow rich (hopefully) slowly.

[catabrit] 23/8/2023 10:55

Yes fair DB and the FCF does tend to jump about a bit too much for my liking because of movements in working capital. But it’s up since I first bought shares and that’s how I measure it. Let’s see if it’s up a year from today!

I’d be amazed if Costain still exists on the public markets a year or two from now if the valuation continues to sit at net cash. Something will happen - either it becomes a value trap and something goes wrong and we’re all proven to be patsies or it gets properly valued and stays independent or it gets taken out.

Complex delivery requires the strong b/s and commands a low multiple. You’ve got to ask if it’s worth it. Fine if margins are stable and you’re only bidding for profitable work; it’s a bit like PE, not a business you run for scale. You run it for profit. Consulting has more scale and better margins and isn’t capital intensive. Alex also (rightly if I might add) pointed to the wider eco-system they can tap into vs peers if they focus on advisory work.

It will be interesting to see what happens. I don’t spend too much time looking ‘up’. Here I look down, feel safe and so keep climbing knowing the upside ought to take care of itself.

Looking forward to the Q&A tomorrow.

[catabrit] 23/8/2023 10:39

STM was but is now being taken private at a juicy premium :)

[dickbush] 23/8/2023 10:34

Catabrit, re your 3029, I wouldn't argue with any of your points except that the statement suggests net cash will be about the same at year end as at 30th June.

At a prospective 4.5 times earnings, net cash about the same as its market value, net interest now making a positive contribution to profits and likely to increase in the 2nd half, I do wonder why this hasn't been acquired.

[the count] 23/8/2023 10:15

--->CATABRIT

Thanks for the catch up CAT.

Just as an aside, are there any other cash generating stocks in the woefully oversold UK stockmarket trading at or very near cash in the bank?

Or in other words, are there any other companies valuing their profitable business at pretty much zero?

Regards,

TC!

[catabrit] 23/8/2023 10:06

As an aside, I don’t know many businesses outside of the alternative asset managers with that much revenue predictability. 90% of the revenue for the second half is already locked-in.

[catabrit] 23/8/2023 09:57

Couple of thoughts from the presentation so far:

1). It’s now clear (highly probable) why Simon Ellison left - his contracts led to margin erosion in the road division which has affected margins overall. Hopefully those are a one-off and I’ll ask more about this. Clearly there was some sort of weird contract quirk because Alex fudged the answer.

2). Alex stressed that they’ve never been busier work / bidding wise.

3). Alex seemed more on edge than usual. I think he’s under pressure to deliver.

4). Forecasting lots and lots more consultancy work.

5). Natural resources (all consultancy pretty much) expected to be half of revenue in the next 5-yrs.

6). Clearly becoming more diversified in terms of customer mix which is good.

[catabrit] 23/8/2023 09:32

The last time I fell in love was with Apollo Global Management at $12. That was a very happy experience considering the current share price of $81.50 :)

Since I invested, Costain has hit every expectation with the exception of margins which I expected to be a bit better in H1.


- no bad contracts (18-months and counting)
- strong net cash (£132m and growing).
- resumption of dividend (imminent).
- pension settlement (done).
- good FCF generation.
- good share price performance (up from my 40p basis, up 25% over 1yr vs down -3% for the FTSE all share).

Those are the facts. And the facts support staying together so I’m happy to stay married.

[casholaa] 23/8/2023 09:02

That's soooo true Sal.

[dickbush] 23/8/2023 08:56

The £5.3 mil write off of intangibles spoilt the initial reading. Ex that and the £2.1 mil restructuring costs, adjusted eps was 4.4p v 3.9p. I.E. adjusted earnings grew 12.1%.

Looking at a divi. Equal to the £3.3 mil pension contribution would mean 1.2p.

Assuming 12.1% growth in adjusted eps for this year, and one third available for dividends I can get to 1.8p assuming a 50:50 split between shareholders and pension contributions. That won't set the world on fire.

The share price appreciation depends on the operating margins hitting the targets for 2024 and 2025. Plus ca change.

For patient investors only with confidence in the management.

[catabrit] 23/8/2023 08:52

The interest on the net cash alone covers the minimum dividend.

[hamhamham1] 23/8/2023 08:47

Nice update. Now net cash balance is about the same as the market capital. Nuts!!!
1.5p interim divi maybe announced soon. With maybe a 2.5-3p final divi later, that would be over 2x cover, no probs, especially as all that cash they got in the bank, so market would be happy with that level of divi.

[chris magpie] 23/8/2023 08:41

Yes probably agree anyway decision required either Dividend or Buy Back option. Results still a little disappointing with Digital Impairment and overall % Profit on Turnover not great but common for this Industry. Lets hope overall probability improves in 2nd half and no more write downs appear. Plenty of opportunities ahead in transport highways water defence etc but Government slowing down money flow future will depend on next government's spending commitments in 5hose areas.

[catabrit] 23/8/2023 08:41

Fixed income yields are a major headwind for all stocks and that’s something I’ve been flagging for ages. Over a year, basically. However, I think a lot of investors are in the game for capital appreciation as well as income potential. Yes you’ll get 5% on your money but that’s capped, essentially. Here and elsewhere you might get less or more than that but pick well and you have the best of both worlds.

[catabrit] 23/8/2023 08:37

Salpara - they will underpromise and over deliver when it comes to the dividend. Initially the market might be disappointed but eventually it will wake up to the earnings power / yield potential considering the underlying FCF generation. Obviously there are some puts & takes because of the pension and its funded status. But the recent changes open the door to a significant rise in dividend potential.

[catabrit] 23/8/2023 08:34

You’re welcome Cerrito. It’s easy to be biased when you’re super long something (and I am disgustingly long this and probably own more stock than any other individual) but I try my upmost to be balanced. Costain is not without its issues and I have no idea how things will pan out but this is very asymmetric and I like the odds at this market cap considering the b/s support, FCF generation, revenue predictability, margin guide and all the changes that have taken place behind the scenes to lower / improve risk management.

[salpara111] 23/8/2023 08:33

Decent update but margins are still virtually non existent.
The only way they will get a sustained share price rise is by reinstating the divi.
When I can get 5.0% on my money risk free there is little point in holding a zero yield stock.
Hopefully that will come in the near future and be a meaningful amount and not a token 2%.

[casholaa] 23/8/2023 08:24

I doubt that this would have fallen below 55-60p earlier in the year if there were a divi. However, the company now seems to be in a much stronger position. I'm torn between a buyback and a divi.

[cerrito] 23/8/2023 08:20

Thanks for that post Catabrit.

[catabrit] 23/8/2023 08:16

About what I expected albeit I was hoping for a better blended margin. They can’t keep promising jam tomorrow - they have to prove they can get it across the business.

Good margins in natural resources and that’s almost entirely consultancy-based revenue. Suspect the margin would be higher if they weren’t investing in growth. That’s where we need to be within transport and it will be interesting to see how we get there. Road is clearly under a bit of pressure but that’s been flagged / obvious all year. Lack of margin probably explains why they came out of a couple of schemes. Curious to see how they position themselves strategically within road. Do they take the long view and prioritise margin and reputation over market share? The facts certainly seem to be pointing in that direction. But what impact does that have on EBIT and margins? How much of the cost base is fixed vs variable? Need to get comfortable with this as it’s a big part of the revenue pie. It would be helpful to know what the margin would have been excluding road.

Re the dividend. As I hinted at yesterday, my inference is that there’s a major battle taking place between the shareholder base over capital allocation. I suspect they’re going to get a temperature check tomorrow from retail re dividends vs buybacks. I want the income yield but buying back stock is a no-brainer here. Key shareholders such as Ennismore and ASGC will be pushing hard for buybacks too.

I’m not surprised about the change in digital. IR alluded to them reigning in some of the moonshot bets / investments and I’d expect that to be reflected in group margin over time. But it does beg the question of whether Alex got the digital strategy wrong in the first place by misallocating resources. He needs to be held accountable here. I’m all for growth and change provided mistakes are admitted and learned from.

Overall, a decent set of results and more evidence that the business has turned a corner and is much lower risk than in the past. I stand by my belief that they will either get the valuation to where it should be or will be forced to put themselves up for sale / get eaten by a competitor.

Let’s see how the presentation goes today at 9am and the Q&A tomorrow.

[casholaa] 23/8/2023 08:04

What a nice rns to wake up to!

[ttny2004] 23/8/2023 07:46

Long suffering shareholders remember to attend if possible and at least in advance ask your questions. I have done this. Your chance to speak!Interim Results Investor Q&ACostain Group PLC ("Costain") announces that Alex Vaughan, CEO, and Helen Willis, CFO, will be hosting an investor Q&A session relating to the Interim Results via Investor Meet Company on 24 August 2023 at 10:00am BST.The Q&A session is open to all existing and potential shareholders. Questions can be submitted pre-event via the Investor Meet Company dashboard up until 9:00am the day before the meeting or at any time during the live presentation.Investors can sign up to Investor Meet Company for free and add to meet Costain via:https://www.investormeetcompany.com/costain-group-plc/register-investor

[boozey] 23/8/2023 07:39

Cash equates to market cap at yesterday's closing price so the business comes for free.

[thags] 23/8/2023 07:36

Decent update. Let's see if the share price wakes up from the coma it's been in. Dividends to resume although doesn't say by how much