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Costain's diversification pays off

Expanding its revenue stream away from pure construction is working well for Costain and more share price upside looks likely
January 24, 2013

■ Strong order book

■ Diversifying revenue stream

■ Net cash position

IC TIP: Buy at 254p

Diversifying away from being a pure construction company is paying off nicely for Costain (COST), as a trading update this month confirmed. A range of new orders and contract extensions means that the order book has been maintained virtually unchanged from a year earlier at £2.4bn. Moreover, over 90 per cent of this comprises repeat orders and that's providing decent long-term visibility. On top of this, Costain has a strong preferred bidder position relating to a further £400m of work.

More work is expected, too, as Costain builds on its ability to provide a one-stop facility for customers seeking an integrated service offering - from consulting and project delivery through to maintenance capability. The group also secured a £48m joint-venture contract with Babcock and Alstom this month, as part of the west coast power supply upgrade for Network Rail.

Group finances are in pretty good shape as well and the company confirmed that it has a strong cash position and no significant borrowings. There's also an attractive dividend on offer that's comfortably covered by earnings.

Panmure Gordon says...

Buy. This was another solid trading statement from Costain and we are attracted by the company's ability to deliver large and complicated infrastructure projects. We are also encouraged by its diversification strategy to expand its pre and post construction services. Moreover, the cash position has remained strong, which we calculate to be around £135m at the year-end. Accordingly, we recently increased our target price to 280p and are forecasting end-2012 pre-tax profit of £30.3m, giving EPS of 36p - which includes a £10.5m profit arising from the transfer of PFI assets into the group pension scheme and £2.7m of one-off pension-related costs.

Liberum Capital says...

Buy. Costain has maintained its order book while improving earnings visibility from £650m a year earlier to £700m of orders secured for 2013. The group's resilient performance is in marked contrast to some of its peers and demonstrates its attractive end-market positioning and strategic focus. Costain's shares are cheap - they trade on around 10 times forecast earnings for 2013; especially so considering the change in emphasis towards becoming a civil engineer with an increased support services offering. Meanwhile, with its exposure to civil - not social - infrastructure, we continue to rate the shares as attractive.