Costain Share Discussion Threads

[thags] 24/8/2023 20:34

One thing that annoys me about these forums which I primarily use for DD and trade ideas is when certain people de-ramp a stock for whatever motive they have. Sikhthetech I understand you're a trader more chart biased but can you please not turn this forum into a dirt slinging arena like so many other ones have become like centamin and nanoco. Let's leave it purely civil and constructive

[sikhthetech] 24/8/2023 20:09

valuehound,
Thanks for the Master Investor article.


From the article - Joe Brent, Liberum, company's broker view:

"He even sees a 1.13p per share dividend this year "

So that's 2.2% yield for this year, fy2023, if/when a dividend is announced!!


"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"

Pre-tax profit of only £41m on £1.37bln sales, obviously because of the minute margins


"Brokers™ Views a Buy With A Target Price Of 80p

More to the point, as I mentioned before, why hasn't the COMPANY broker, who you'd expect to be positive anyway, upped their target price?.
They've quoted 80p for years. Didn't reach it before, so why should they reach it this time?


Anything from Peel Hunt? They still appear to have a 50p target!!.



sikhthetech - 11 May 2023 - 12:24:37 - 2799 of 3085 Costain - COST
Liberum, the house broker, have had a 'buy' recommendation for years, so it's nothing new, is it?
<...>


As the house broker, you'd expect them to be positive
... lots of could, should, assume, maybes, ifs.



From MI:
"A correction in price back up to the 62p achieved in late April this year, looks more than achievable."
Possible, given they reached that in April before falling back.

[boozey] 24/8/2023 18:46

Any mention of buybacks on the call?

[casholaa] 24/8/2023 17:49

Excellent piece.

[value hound] 24/8/2023 17:33

From Master Investor FWIW... (but it seems a surprisingly modest target price???)

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.

[sikhthetech] 24/8/2023 15:01

Catabrit,

"construction, not infra. Big distinction."

Construction/Infrastructure are linked. They get impacted when UK spending slows down.

Costain already said profits are down. Higher interest rates help as they gain more interest with cash in the bank but the same higher interest rates slow down the economy and spending.

The govn is reducing it's spending. Look at my comments on Housebuilders (yes different) and how that sector would be impacted by govn support/spending ending and it has.

[casholaa] 24/8/2023 14:41

My bad. 3.5 + 2.3 / 2 is indeed 2.9

[disc0dave45] 24/8/2023 14:35

Am I missing something, doesn't matter what the Rev is or op profit if they said in the Q&A that outturn op profit margin for FY23 is 2.9% and H1 was 2.3% then as DB posted that means an op profit margin of 3.5% for H2....or I need to lie diwn in a dark room!.

[casholaa] 24/8/2023 14:25

@DB,

"Operating Margin 2023: 2.9%. Assuming Revenue of £700 mil 2nd half suggests 2023 Op Profit of £39.6 mil, up 9% on 2022. It also implies a 3.5% Op Margin in the 2nd half."

Annual OP on static %2.9 @ 700m = 20.3m OP
Annual OP on h1/H2 variables @ %2.9 + %3.5 / 2 = %3.2 = 22.4m

You need to take into account, contract completions in H1 & H2 at varying OM rates & any investments made.

Did they say anything about the JV with, I think it is with Kier??

p.s., the may have 650m coming in the H1 and 50m in H2 at a higher % OP rate !!!!

[dickbush] 24/8/2023 13:59

Would someone check my maths above. If right, the implication is for a 2nd half Operating Margin of 3.5%, something that wasn't supposed to be on the cards until 2nd half 2024. If so, that would be quite exciting. Yes/No?

[pinemartin9] 24/8/2023 13:51

Golden cross a-hoy!

[chris magpie] 24/8/2023 12:40

Would say these days up front contract payments rare although will be some on HS2 showing within Joint Arrangements pot of £50m but generally these relate to Advance Payments made to Stubbins so very little impact if at all on actual cash balance. Given Costain in top 3 of payers on time in there sphere looking good to me.

[catabrit] 24/8/2023 12:23

Sikh - construction, not infra. Big distinction. Likewise, most of those are sub scale contractors who bid aggressively for work irrespective of margin. None of those are involved in major tier 1 infrastructure projects with blue chip counterparties or government. The bigger more established firms are more risk averse now. It’s less about the order book and revenue and growth and more about “cash”, “balance sheet” and “margin”. Why? Because of incentives. They want a proper valuation multiple. And they know they won’t survive another Carillion.

You’re doing what all investors do - fighting the last war. The tier 1 contracting world changed in 2018 much like banking did after Lehman.

[muckshifter] 24/8/2023 12:10

I don't think upfront payments will constitute any significant part of the £132m, but obviously from the published results there is £60m (iirc) more owed by them than Costain is currently owed for work done, which is mostly down to normal payment arrangements with subcontractors who get paid a month after Costain. That is not a problem if workload is stable or increasing, and only drains cash if workload falls drastically.

PS. In terms of covenants I doubt if Costain are anywhere near breaching any, and I certainly wasn't suggesting they were!

[sikhthetech] 24/8/2023 11:43

DD,

"We also don’t know how much of the £132m net cash is upfront contract payments"

That's my point. So they don't have £132m to play with, do they?

They had the results and now investor presentation and still it's not clear.

[disc0dave45] 24/8/2023 11:39

Div pa could be circa £10m, they only pay about £3.5m as pension deficit payment so with their "parity arrangement" they would also have to pay an additional £6.5m to the pension which is double their normal yearly contribution and equating to an additional £16.5m cash outflow for the year.We also don't know how much of the £132m net cash is upfront contract payments, is it £50m?, so as they've stated they can't even confirm until the surety notice period has expired and we don't know what the notice period is. Patience required but I'm comfortable that a div will be paid.

[sikhthetech] 24/8/2023 11:36

Muckshifter,

"If its recently negotiated bank agreements have covenants it just has to avoid breaching them."

If they are trying to avoid breaching banking covenants with just 2% of Net cash then, given the UK is in a slowdown and govn are cutting back, it's unwise to pay any dividend.

That 2% is significantly lower than the interest they should be earning.


Especially as the number of construction companies going under is at the fastest rate in a decade.



UK construction companies go under at fastest rate in a decade

[disc0dave45] 24/8/2023 11:06

"Divi: suggestion that it would be in line with the new ?3.3 mil paid to the PF i.e. 1.2p."That ties up with earnings forecast (FY23 10.7p according to Stocko), div cover (they've increased from 2.5x to 3x) and their one-third interim and two-thirds final split.(10.7/3) x 0.33 = 1.19p interim div(10.7/3) x 0.66 = 2.38p final divTotal 3.57p, circa 6.8% yield.

[muckshifter] 24/8/2023 10:59

Don't think Costain have to negotiate with its banks over dividends. If its recently negotiated bank agreements have covenants it just has to avoid breaching them.

[dickbush] 24/8/2023 10:46

The early points made in today's meeting were:

Divi: suggestion that it would be in line with the new £3.3 mil paid to the PF i.e. 1.2p.

Revenue 2023: 2nd half similar to first. That doesn't agree with yesterday's statement which implied £700 mil plus. I'm assuming that she was wrong.

Operating Margin 2023: 2.9%. Assuming Revenue of £700 mil 2nd half suggests 2023 Op Profit of £39.6 mil, up 9% on 2022. It also implies a 3.5% Op Margin in the 2nd half.

Bid: No approaches.

[catabrit] 24/8/2023 10:36

A good investor meet today. I think Costain’s strategy and point of difference vs peers will become loud and clear to the market over the coming quarters and years. And when that happens, it will be a beautiful “re-ratingR21; to paraphrase Ray Dalio!

[trader465] 24/8/2023 09:28

Some interesting comments on COST:

[ccsicemanandrew] 24/8/2023 08:45

Before it can pay a dividend it has to go though negotiations with its banks over an £85 million overdraft. An arrangement that has covenants around sustainability targets and dividend payments.