On the back of a profit warning at the end of June, investors were probably braced for some uncomfortable reading amidst Costain’s (COST) half-year results. Hampered by the previously announced contract delays and cancellation of the M4 corridor project, underlying operating profit fell by 9 per cent to £21.2m for the six months to 30 June. With a larger impact anticipated in the second half, full-year guidance of £38m-£42m would be down by around a quarter from the £52.5m reported for FY2018. Meanwhile, statutory earnings have been weighed down by a £9.7m exceptional charge relating to the cost of previous remedial works where the sub-contractor went into administration.
More positively, there was a 0.5 percentage point expansion in the underlying operating margin to 3.5 per cent. This reflects a shift towards higher-margin services, which now account for around a third of operating profit. With new chief executive Alex Vaughan at the helm, the group launched its “leading edge” strategy back in July which will accelerate the transition away from complex construction programme delivery towards higher-margin services such as consultancy, asset optimisation and digital technology solutions. Targeting a 6-7 per cent margin by 2024, the group is aiming for higher-margin services to comprise 55 per cent of operating profit.
With faster payments to suppliers, the average time taken to pay invoices has reduced from 59 to 36 days and the group has been reinstated to the prompt payment code. But this has contributed to average month-end net cash plummeting by 43 per cent to £63.7m. Expected to sit in the range of £40m-£50m for the full year, this would be below Peel Hunt’s previously estimated £55m.
Investec anticipates adjusted pre-tax profit of £38.5m and EPS of 24.6p for the full year, rising to £43.9m and 28.6p in 2020.
| COSTAIN (COST) | ||||
| ORD PRICE: | 161p | MARKET VALUE: | £174m | |
| TOUCH: | 160-161p | 12-MONTH HIGH: | 467p | LOW: 142p |
| DIVIDEND YIELD: | 8.6% | PE RATIO: | 7 | |
| NET ASSET VALUE: | 165p* | NET CASH: | £40.8m | |
| Half-year to 30 Jun | Turnover (£m) | Pre-tax profit (£m) | Earnings per share (p) | Dividend per share (p) |
| 2018 | 759 | 19.9 | 15.1 | 5.15 |
| 2019 | 594 | 8.4 | 7.0 | 3.80 |
| % change | -22 | -58 | -54 | -26 |
| Ex-div: | 12 Sep | |||
| Payment: | 18 Oct | |||
| *Includes intangible assets of £58.2m, or 54p a share | ||||
