Costain Share Discussion Threads

[catabrit] 18/7/2023 12:55

Agreed pine. I think the half year will be the next catalyst if we don’t hear anything about contract wins in the interim. I’d expect some sort of buyback announcement or dividend initiation - maybe both.

The neat thing here is that they have the potential to do both because the ongoing FCF can be partly used to pay the divi and the cash on hand can be used to buyback some stock.

Let’s see.

They’re not silly and they will know that retail is taking money out of speculative / growth stuff and sticking it in safer fixed income. You only have to look at what’s happening in the resource sector to see evidence of that. People can get good safe yield for 1-3yrs and all equities have major competition.

If Costain want retail flows - and it’s retail that moves the stock day to day sadly - then it needs to pay a dividend and hint at bigger payouts to come.

As a big holder of stock, I’d like to see my pro rata share of that dividend increase by them reducing the share count by 10%.

But I fear that unlikely.

Either way, although the bid price tends to fluctuate day to day it’s trending in the right direction and I’d be amazed if we weren’t well into the 50s come results day.

UK equities are absurdly cheap and we’re seeing a lot of take privates. Not saying that Costain will benefit from that but it’s clear the UK market isn’t being appreciated by public investors and thus is beginning to lure the vultures who sniff a bargain.

[pinemartin9] 18/7/2023 12:43

Feels like we just need that bit of killer news from COST and this will move upwards. Either that or a tipster buying some/recommending!

[casholaa] 17/7/2023 11:40

I think the sensible approach for Costain is the EV measure hxxps://www.investopedia.com/terms/e/enterprisevaluesales.asp

[casholaa] 17/7/2023 11:37

Nahh. I think the money going into the 'market' isn't what it used to be. As a result, I also think that it's a 'buyers' market and the 'buyers' are looking for the best-bang they can get for their money. So the buyers are looking at PE and divi returns against the market caps. No divi, less demand and mcap suffers. The divi % against the share price also matters more now between choosing which company to dip one's toe into.

[catabrit] 17/7/2023 11:15

That was a nice RNS to wake up to this morning. So let’s recap where we are;

- we’ve had management guide / hint / target margin expansion.

- we’ve had management proactively decline risky work.

- we’ve had two pretty big contract wins in a sector of the business that is growing but largely ignored by investors (water and nuclear).

- we’ve had a settlement with the pension trustees that has the potential to free up a lot of FCF.

And we still have a market cap that barely trades above net cash.

So, what does it mean?

It means we have a long way to go…

[casholaa] 17/7/2023 10:18

Do they have fat-bergs up norf or is it just a London thing?

[this_is_me] 17/7/2023 08:20

It helps to de risk the business and make it easier to negotiate other contracts.

[pinemartin9] 17/7/2023 08:11

Good news!

[ttny2004] 17/7/2023 07:33

Costain Announces Key Contract ExtensionUnited Utilities extends contract into next water regulatory cycleCostain Group PLC ("Costain") announces that it has been appointed by United Utilities to work as its Managed Service Provider (MSP) for a further two years, from May 2024 to May 2026. This contract extension has an option to be extended for a further three years and builds on the original five-year MSP contract awarded in 2019. The award extends into the next regulatory cycle (AMP8 2025-2030).United Utilities is the UK's largest listed water company and is working to ensure the resilience of its network to the effects of climate change, including improving the quality of its wastewater effluent and providing a reliable drinking water supply to its customers.Since 2019, Costain has provided management and asset maintenance activities throughout the north-west at 96 water treatment sites, 575 wastewater treatment sites, pumping stations and service reservoirs which serve over seven million people.The MSP framework consists of two types of work:-- Core contract: This includes maintenance services of very high-volume, short-duration activities to more than 900 sites covering repair, replacement and refurbishment of equipment such as pumps. It also covers core projects which are of a greater scale and complexity, delivered as projects. Since the start of 2022, the MSP has developed solutions to 132 Core Projects including installation of a new mixer system within Wayoh Impounding Reservoir, Lancashire and an upgrade to existing gas holders at Manchester Bio-resource Centre (MBC) at Davyhulme Wastewater Treatment Works in Greater Manchester.-- Non-core contract: This includes the delivery of larger capital projects such as the design and construction of remedial improvements to the Clough Bottom Impounding Reservoir in Lancashire and upgrades to the Audlem Wastewater Treatment Works in Cheshire.Within the MSP Framework, Costain has delivered a wide range of activities and projects to date and made a significant contribution to United Utilities meeting key regulatory requirements.Sam White, managing director of Natural Resources, Costain said:"This is a strategically important contract for Costain. We've already delivered big improvements working together with United Utilities on the MSP Framework, leveraging increased automation of data processing and insights to enhance our service delivery. I'm delighted that we'll be continuing this relationship to help United Utilities ensure a sustainable, resilient and efficient service for its customers."

[dickbush] 11/7/2023 09:22

"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."

Exactly my reason for investing. I'm more optimistic on the development of the business producing increasing net cash, and the probability of a substantial bid premium if the market doesn't price the company correctly. This assumes, of course, that the plan becomes reality.

[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