Costain remains undervalued despite revenue visibility

On the face of it, you would imagine that an infrastructure provider such as Costain (COST) would be ideally placed given its focus on sustainability. But it is still faced with the usual problems linked to the tendering process and the impact of variable costs.

So, the assertion by Alex Vaughan, chief executive officer, that “contract margins are in our target range and at the right risk level” was reassuring on a day in which the group revealed a 10.5 per cent increase in the adjusted operating profit to £40.1mn on a 40 basis point increase in the underlying margin. Reported figures were held in check by a combination of impairments and restructuring/transformation costs, while increased activity in rail was offset by lower volumes of work at both highways and integrated transport projects.

That said, in the lead-up to publication of its full-year figures, the group announced that it had been appointed by Transport for London (TfL) to progress two major refurbishment projects at Gallows Corner Flyover and Brent Cross Interchange. The group subsequently moved its head office to the City of London, perhaps signifying the importance of the capital to its growth plans.

Variations in the order book tend to reflect procurement periods in the group’s chosen markets. But Vaughan also noted that the group had “more than 80 per cent of expected revenue secured for 2024 and [the] forward work stands at around three times 2023 revenue”.

Shareholders will be pleased that Costain restored the annual dividend, supported by solid free cash flow generation. Yet the market is ascribing little value to the active business given that cash profits are roughly equivalent to the group’s enterprise value. With the shares trading at a modest 14 per cent premium to net assets, we reiterate our buy call.

Last IC view: Buy, 50p, 23 Aug 2023