Costain Share Discussion Threads

[owenski] 31/8/2024 08:54

Would think 135p TP would be easily achievable bearing in mind the cash generation here alone based on those consensus figures.

[owenski] 31/8/2024 08:48

On the latest results webcast, Costain's PR guy said he'd put the latest analyst figures on the Costain website, below are the consensus views -


"Date: August 2024

Consensus based on average of research from the sell-side analysts who cover Costain."


......................FY 2024E FY 2025E FY 2026E
Revenue (£m)............ 1260.3 - 1238.3 - 1271.3
Adjusted operating...... 42.3 - - 46.6 -- 50.1
profit (£m)
EPS adjusted (p)........ 12.3 -13.5 -14.6
Net cash at
period end (£m)......... 160.3 - 182.7 - 204.2

[catabrit] 30/8/2024 13:54

I would say this is directionally correct (helped too by how consistently right they have been on Costain in the last 3yrs) but must also be weighted by the knowledge that they are the company broker.

[someuwin] 30/8/2024 09:52

Panmure Liberum have published an excellent 40 page note on COST. Summary below...

Strong momentum Buy Target Price 135.0p

The H1 24 results were strong and ahead of estimates. We make three key points: 1) We expect £158m of net cash in FY 24 (with limited negative working cap.), which is 54% of the company’s market capitalisation; 2) We estimate an improving EBIT margin of 4.4% in H2 (H1 24: 2.5%), with milestones reiterated and a target of 4.5% in 2025, which we believe could be attainable and would be market leading; and 3) Costain remains well positioned to benefit from a strong infrastructure outlook in the UK, particularly in Water, as evidenced by recent contract wins. A CY 25 FCFe yield of 11.9% and CY 25 P/E of 7.3x are simply too cheap, given £158m of expected cash on the balance sheet.

Key points

H1 24 FD EPS was 17% ahead of our estimate and FCFe was £14m, showing strong cash generation. H1 24 DPS of 0.4p declared. H1 24 spot net cash of £166m.

Value drivers

Margin milestones reiterated with a target of 4.5% in 2025, which would be market leading. We estimate an improving EBIT margin of 4.4% in H2 24.

What market misses

Sustainable FCFe >£30m. More than £5bn of work at year-end. Water can double medium term. More neutral working cap than most. No more const’ fixed-price contracts.

Is there value?

TP of 135p based on SoTP. £10m share buyback ongoing. Shares trade at CY 25 P/E of 7.3x. Sustainable FCFe of >£30m gives a yield of >10%, which is too cheap.

[cestnous] 28/8/2024 07:47

Very glad that I didn’t take the IC sell advice a couple of months ago.

[ajbird] 25/8/2024 07:07

Thanks both for the link

[owenski] 25/8/2024 06:39

Clickable link

[ttny2004] 24/8/2024 22:25

https://news.uk.cityam.com/story/2251671/content.html

[ajbird] 24/8/2024 10:57

Is it possible to post it or the link to it please?

[techno20] 24/8/2024 09:20

IC buy recommendation repeated in the Weekend FT.

[pinemartin9] 23/8/2024 22:14

Yeah, what a week! Well done all.

[this_is_me] 23/8/2024 15:45

Great week for holders.

[homeboy] 23/8/2024 15:42

massive coverage in the paper today, massive, somebody i've never met said something about costain today, or was it yesterday, maybe it's tomorrow,,,,, bloke in the pub said something or t'other too, not sure what he said but it's all looking grand, pile in

[cestnous] 23/8/2024 11:37

Nice article and buy rec in IC. Can’t copy sorry

[mirabeau] 23/8/2024 11:14

Stockwatch: serious upside potential at this small-cap

Analyst Edmond Jackson examines a firm set to benefit from the UK’s strong infrastructure outlook.

23rd August 2024 11:41

by Edmond Jackson from interactive investor

Share on

Related Investments

COST

0.10%
KIE

0.13%

Upside for this share 600

Can talk from the management of Costain Group COST

0.10%
about doubling its operating margin to around 5% be taken seriously? It is the crux for the small-cap shares in this infrastructure group serving transportation and resources – especially water industries.

Since I drew attention as a deep value “buy” at 50p in March 2023, following better-than-expected 2023 results, the stock has doubled to 105p. I re-iterated “buy” at 53p last August after interims and at 72p last January. The market appeared over-cautious – a 12-month forward price/earnings (PE) multiple as low as five, that has risen to about eight times – despite Costain being strategically well-positioned as Britain tries to improve infrastructure.

Invest with ii: Top UK Shares | Share Tips & Ideas | What is a Managed ISA?

This new Labour government is fiscally constrained yet infrastructure spending is going to be a key element in its electoral pledge to deliver growth. Today brings news that it is seeking to adjust the measure of national debt, so that investment spending is not included.

The stock has climbed a wall of worry, how big infrastructure projects can end up in over-spend and acrimony. Over five years ago, Costain’s A465 road project in Wales ended up two years late amid engineering and contractual challenges. There was then the disruption of Covid.

Costain’s CEO since May 2019 contends that there is nowadays a broader customer and service mix. Financially and also limiting downside risk, I note the 30 June balance sheet was absent of debt and had net tangible assets of 65p a share. Achieving this was helped by a May 2020 issue of 167 million shares at 60p, the current total being 278 million. In which case, the five-year chart suggests Costain has effectively just regained its February 2020 value:
Five-year chart for Costain

Source: interactive investor. Past performance is not a guide to future performance.

In 2018 it traded over 400p hence 200p or so nowadays would mark recovery to the old high.
Scope to re-rate margin is the crux issue going forward

The table since 2017 shows the highest achieved – in terms of reported operating margin – has been 3.0% and for this score I have looked back to 2012 when it was 1.8%, rising to 2.5% in 2013. This is quite as you would expect in a competitive tendering industry.

Peer group Kier Group KIE

0.13%
, for example, similarly had its best operating margin in its June 2018 year at 3.1% and, since Covid, has managed to deliver only 2.4%.

Costain Group - financial summary
year end 31 Dec
2017 2018 2019 2020 2021 2022 2023
Turnover (£ million) 1,684 1,464 1,156 978 1,135 1,421 1,332
Operating margin (%) 2.8 3.0 -0.3 -9.4 -0.8 2.5 2.0
Operating profit (£m) 47.5 43.4 -2.9 -91.8 -9.5 34.9 26.8
Net profit (£m) 33 33 -2.9 -78.0 -5.8 25.9 22
Reported EPS (p) 27.1 26.8 -2.4 -36.7 -2.1 9.4 7.8
Normalised EPS (p) 27.1 35.2 16.1 -31.2 -2.1 9.8 8.5
Operating cashflow/share (p) 42.8 -39.2 -26.5 -22.1 10.7 5.1 19.7
Capex/share (p) 1.7 1.1 5.7 1.9 0.8 0.2 0.0
Free cashflow/share (p) 41.1 -40.3 -32.2 -24.0 9.9 4.9 19.7
Ordinary dividend per share (p) 12.4 13.4 3.4 0.0 0.0 0.0 1.2
Covered by earnings (x) 2.2 2.0 -0.7 0.0 0.0 0.0 6.5
Return on total capital (%) 19.8 17.5 -1.3 -41.1 -3.8 14.9 11.4
Cash (£m) 249 189 181 151 159 124 164
Net debt (£m) -178 -119 -34.9 -70.8 -93.2 -94.3 -140
Net assets/share (p) 129 151 129 56.9 72.4 76.8 79.3

Source: historic company REFS and company accounts

Costain proclaims it can raise operating margins towards 5%, hence would transform profit on, say, £1.4 billion revenue – considering there is no interest charge, instead, net interest from £166 million cash. The capitalisation around 105p currently is £290 million.

Care is needed swallowing such a claim, given management will be talking of an adjusted, not reported, margin; although Costain also says it is expecting exceptional and restructuring-type charges to tail off in 2025. For now, the latest interims to 30 June proclaim an adjusted margin of 2.5%, while the income statement computes at 2.2%, hence no major discrepancy.

Within the two main divisions: transportation-related works were on a a 3.1% adjusted margin on £444 million revenue, while natural resources’ work achieved a better 4.3% on £195 million revenue, possibly the water industry has helped - revenue up 12% - although the relatively smaller defence and nuclear is up 16% also.

More upgrades for ‘too cheap’ projects firm
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The financial summary table shows scant capital expenditure required over the years; but implicitly something radical needs to happen within administrative expenses that eased from 5.0% of 2023 interim revenue to 4.8% in 2024. How practical is it, to grind them materially lower?

Competitive pitching on contracts’ price is not going away, unless Costain can demonstrate more effective work, worth paying more for. Government and utilities seem likely be price-conscious. Yet Costain’s CEO has put his neck on the block, saying he can nearly double the group operating margin.

Mind, his referencing a 3.5% margin this year means the run-rate – which could imply exiting 2024 at such a level, than delivering with the annual results.

The dynamics of Costain’s income statement are such that a reported interim net profit of £13.5 million can be outstripped in the second half, hence £30 million or more, plenty achievable for the full year. In which case, earnings per share (EPS) around 12p with scope to double by 2026 if the CEO delivers on margin. If realistic, this share is on a mid-single-digit forward P/E like it was around 50p.

Not to fret overly on margin but make clear, buyers on such hope are trusting management.
‘Strategy of the past years has built momentum’

Again, is the CEO’s pitch versus interim group revenue easing 4% amid a small fall in the main transportation side versus growth in natural resources. Such a contractor is always going to be “lumpier” than, say, a licensing business with majority recurring revenues, so I would not read much into an interim slip.

He contends, a significant volume of high-quality work has been secured in the first half and the group order book is three times revenue. In a presentation he has hinted at more announcements due in the second half.

Over £500 million work has been awarded from the water industry in the last two months, and this sector is seen as offering the best growth opportunity over the next few years. Indeed, public controversy persists over water quality, sewage spillages and so on, with utilities under pressure – from the new government also - to improve.

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UK stocks backed after ‘remarkable’ run
Water giant backed to keep dividend afloat

This helps counter concern over how Labour’s new chancellor has axed some infrastructure projects after a spending audit located nearly £800 million unfunded transport projects. After experiencing cancellation on parts of the HS2 rail link, in 2022 Costain won £60 million work for the £1.7 billion road tunnel under Stonehenge – now put on hold. This is modest, however, in context of a £4.3 billion order book which has moved on from risky fixed-price construction contracts.
Modest dividend yield albeit £10 million share buyback scheme

It appears that buybacks to March 2025 are an alternative means of delivering shareholder return than materially raising the dividend, where a parity arrangement exists with contributions to the pension scheme.

From a question at the interim results’ presentation, the chief financial officer said this parity matter will be reviewed next March, but hopefully will not persist and the board considers it very important to return to a progressive dividend policy.

Meanwhile, it looks as if earnings cover for the dividend could end up as high as 10x this year alone – so if the operating margin is raised then dividends over 5p a share (as in previous years but respecting dilution) would provide a more material yield in due course.

With a robust cash flow profile (albeit interim net operating cash flow down 20% at £14 million) management says it is also seeking acquisitions. If proving attractive then they ought to help sustain interest in the stock besides contract wins.
Shifts from ‘deep value’ to a more speculative ‘buy’

Costain’s financial profile has overall become less risky and I regard the stock as at least a strong “hold”. In a relatively tight market, it has been teased up from an 80p range since last spring to a week ago, as buyers react to upside potential towards 150p and more – if operating margins around 5% can be delivered.

On an enterprising view I maintain a “buy” rating; but please respect that this involves an aspect of speculation rather than a disciplined investment approach based on “margin of safety”.

Edmond Jackson is a freelance contributor and not a direct employee of interactive investor.

[roguemale1] 23/8/2024 09:42

So from that presentation divi staying same. The buyback is the only benefit from pension surplus...

[owenski] 23/8/2024 08:16

Yesterdays PI presentation on IMC platform.

[ttny2004] 22/8/2024 20:17

3 analysts ratings - recently revised based on this week's resultsMin 115pHigh 135pAverage 121.5phttps://www.tradingview.com/symbols/LSE-COST/forecast/

[scemer] 22/8/2024 14:20

Good valid points owenski, I think it's in slow burn up mode strengthening on updates

[owenski] 22/8/2024 13:00

Not particularly interested in broker targets, crystal ball reading and finger in the air at best. But, like to see projected figures from the house broker at least for revenue guidance, margin, cash etc. One can then apply ones own insights as to likely share price value.

Revenue for example likely to be flat this year and next, due to the cycle of where they're at in contract negotiations. But after that, they look to be locked into some sustainable revenue growth verticals with water in particular looking to double in sector size - (Source, recent analyst webcast) They are pitching for a lot of work across multiple sectors and have an advantage of being woven into the DNA of some of their customer base due to their initial design consultancy approach, this shows sticky relationships.

Meanwhile cash will remain healthy, and margins moving incrementally up to c4.5%, it's also possible that this could move above 4.5% in future reporting periods. Bear in mind, most of their metrics are second half weighted.

Also, the interesting dynamic still exists, this remains on a low multiple and is backed by a cash position that effectively leaves the business valued at 120m.

All IMO

[roguemale1] 22/8/2024 11:50

It was the baron investments link. Panmure Liberum 135

[roguemale1] 22/8/2024 11:48

Well I think that it shouldn't do anything too dramatic in a downward direction at least until the buyback is finished/and or started. Another stock I hold is buying back and there's an RNS each day with a list of purchases from the previous day. Nothing here this am so maybe started today?

As for broker notes, I thought one of the links posted late yesterday on here or LSE gave a 115 and a 135? Peel Hunt was one (house broker?) can't remember the other will have a look.

[thags] 22/8/2024 11:48

I still think there's a good chance of a pullback to 90p which is healthy before we make the next move up to 133. If it decides to consolidate and make a bull flag around 100p then that's good too. After a vertical move up in overbought conditions we usually do see a pullback. Just a shame they didn't start buybacks at a much lower price