Costain not looking so smart

Back in June, house broker Investec described the group’s revised 2019 underlying operating profit guidance of £38m-£42m as setting the bar “at a level Costain can comfortably clear”. But even that has proved a stretch. Another profit warning followed in December as arbitration over additional design costs on the A465 road project triggered a £20m write-off. Together with £16m of foregone profit from the earlier delays and cancellation, underlying operating profit plunged two-thirds in 2019 to £17.9m. With a £9.7m charge from another unfavourable arbitration and a £5.9m impairment on the sale of its Spanish assets, it swung from a £40m statutory pre-tax profit to a £6.6m loss.

Costain is shifting away from complex programme delivery towards higher-margin services such as consulting and ‘asset optimisation’. These activities currently account for a third of underlying operating profit and the group hopes this will reach 55 per cent in 2024. It is targeting a 6-7 per cent group margin in the same timeframe, although the 2019 margin collapsed from 3.5 per cent to 1.5 per cent. Looking ahead, joint house broker Liberum places the margins for its two divisions – ‘transportation’ and ‘natural resources’ – at 3.8 per cent and 4.3 per cent respectively in 2022, leaving more work to do.  

With net cash and no supply chain financing, Costain’s balance sheet was previously a key differentiator. However, ignoring £30m in lease liabilities, net cash almost halved in 2019 to £65m. While, excluding the £84m tied up in joint ventures, the group had £19m net debt. The group blames this on working capital pressures. Paying suppliers more quickly to reduce the average number of payment days from 58 to 34 drained around £15m of cash. The A465 road project also drove a £37m cash outflow.

The company has scrapped the final 2019 dividend after already cutting the interim payout by over a quarter. The group is proposing a fully underwritten £100m equity sale to strengthen the balance sheet, but attempting to raise funds under current market conditions is cause for concern. Extending the maturity date of its £187m of banking facilities to September 2023 is contingent on the fundraising.