Costain is set to restart dividend payments

Given the turmoil that contractor Costain (COST) has been through in recent years, another steady if unspectacular set of results was welcomed by investors – particularly the news that it is planning its first dividend payment in four years (although it hasn’t yet said when).

Adjusted operating profit of £15mn for the first half was up 7.1 per cent on last year, although a £5.3mn impairment – a write-off of capitalised development costs incurred on a business line no longer being offered by its digital division – dragged down reported profit by a fifth.

Moreover, after the company admitted in June that it would no longer be involved with the £1.3bn A66 project for National Highways, the fact that there were no other nasty surprises was a relief.

The contractor incurred another £2.1mn of costs on its ongoing transformation programme, although it said the benefits from this would feed through in the second half of this year and the whole of next. It is guiding for the improvement in adjusted operating margin – up to 2.3 per cent in the first half, from 2.1 per cent a year ago – to reach 3.5 per cent next year as it also improves risk management processes. 

Although its order book has weakened by £300mn since the year-end to £2.5bn, Costain has continued to grow its cash pile and, with payments into its pension scheme set to fall from next year, we reiterate our view that this is a less risky business than its valuation implies. Costain's shares trade at just 4.5 times FactSet consensus forecast earnings of 11p a share, and its £138mn market cap is only £6mn more than its net cash balance (excluding leases). Buy.

Last IC View: Buy, 14 Mar 2023