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Contract delays hit Costain

The infrastructure solutions provider has warned that 2019 earnings will miss expectations on the back of delayed contract start dates
June 28, 2019

A half-year trading update from Costain (COST) has warned that although first-half performance has been in line with expectations, 2019 full-year revenue will be lower than expected – analysts are estimating a £250m shortfall. Underlying operating profit is expected to be between £38m and £42m, below Investec’s previous forecast of £55.7m.

IC TIP: Hold at 184p

This is on the back of several delays to contract start dates and new awards, with affected projects including the M6 'smart motorway' and the southern section of HS2. Analysts at Liberum therefore expect infrastructure operating profit to be 37 per cent lower than previously thought at £30.5m. But the impact will not be isolated to this year. The cancellation of the M4 corridor project around Newport last month is likely to reverberate into 2020 and beyond.

Hoping to soothe investors’ concerns, the group is pointing to its £4.2bn order book – some 14 per cent larger than at the 2018 half-year stage – and the £1.1bn of revenue secured to date for 2019. New orders include long-term AMP7 awards for Severn Trent (SVT), United Utilities (UU.) and Yorkshire Water, which have strengthened the group’s position in the water market. Around £900m of revenue has also been secured for 2020 (versus £850m for 2019 at the same stage last year), comprising higher-margin business overall.

Although the group has positive net cash, the expected average month-end net cash balance of around £65m would be 28 per cent lower than the first half of 2018. Liberum has reduced its forecast for full-year average net cash by 35 per cent to £55m. This is after a one-off £9.8m charge relating to an arbitration decision on the cost of previously completed remedial works where the subcontractor fell into administration.

Investec has revised its forecasts downwards, now anticipating adjusted pre-tax profit of £33.1m and EPS of 24.8p in 2019, rising to £38.5m and 28.9p in 2020.