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Costain overhauls its tendering process

The infrastructure specialist recorded a pre-tax loss last year due to problematic contracts
Costain overhauls its tendering process
  • A new approach to tendering contracts has been put in place 
  • Management is targeting more sophisticated contracts to boost margins

Burned by hefty costs relating to problematic contracts, Costain (COST) has put in place measures to improve its approach to tendering for new work. The infrastructure specialist has bolstered its senior leadership team, appointing a new chief financial officer and general counsel following the hire of a new managing director for the transport division, all while establishing a new approval process for contracts. 

A risk and assurance review into tenders would enable the group to “challenge ourselves hard that we really understand the risk and have communicated our expectations to the client”, said chief executive Alex Vaughan. That also means taking a more sensible approach to risk-sharing within contracts, he said, adding that “we’re very clear about what we know and what we can take a risk on”.  

Adjustments to contracts with National Grid (NG.) and the Welsh government totalled £95m and pushed the group into a pre-tax loss in 2020. The legal process surrounding the former contract could result in a wide range of outcomes for Costain, from a cash inflow of up to £50m to it having to make a further payment of up to £57.3m. Any further adjustments would be made during the first quarter of 2022. That could also erode the group’s cash position, which stood at a net £102m - excluding lease liabilities - thanks to a £100m equity raise in May.

The focus now is on completing more multi-layered contracts. Offering additional consulting and digital services typically carries a margin of around 8 per cent, compared with the 3 to 5 per cent attached to pure construction contracts. Consultancy roles currently include working with Transport for London on the Hammersmith Pedestrian Bridge and the A40 Westway upgrade. Management has set a medium-term divisional margin target of between 6 and 7 per cent and hopes to generate 55 per cent of profits from higher margin services. 

Contract wins and extensions totalled £1.1bn last year, which meant the order book was maintained at £4.2bn. Yet by targeting core public sector infrastructure, the group could stand to benefit from the government’s pledge to ‘build back better’. However, profitability remain a concern as even on an adjusted basis, the operating margin came in at just 1.7 per cent. 

Analysts at Peel Hunt trimmed pre-tax profit and earnings per share forecasts for this year to £26.5m and 7.9p, respectively. That leaves the shares trading at nine times forward earnings, only a marginal discount to the five-year average. Sell.

Last IC View: Sell, 45.7p, 14 Sep 2020

TOUCH:68.9-69.6p12-MONTH HIGH:99pLOW: 29p
Year to 31 DecTurnover (£bn)Pre-tax profit (£m)Earnings per share (p)Dividend per share (p)
% change-15---
*Includes intangible assets of £52.1m, or 19p a share