Less than four months ago just before the late August Interim Results announcement, I noted that the shares of Costain Group (LON:COST) the UK infrastructure engineering company, then at 89p, were far too cheap.
Since then, the sector, in which it is a major player, has been rocked by the collapse of the ISG Construction group, with some 2,000 of its employees being made redundant as all of its projects were stopped.
That was the biggest failure since Carillion went bust in 2018.
Yesterday the group, whose shares are now 104.50p, announced a big new contract, demonstrating to me that its shares are still too cheap.
The Business
Founded in 1865 and based today in Maidenhead, Costain is a British construction and engineering company.
Its history includes extensive housebuilding and mining activities but is now more focused on civil engineering and commercial construction projects.
It was part of the British/French consortium which constructed the Channel Tunnel at the end of the 1980s and has been involved in Private Finance Initiative projects.
Costain helps to improve people's lives by creating connected, sustainable infrastructure that enables people and the planet to thrive.
The group shapes, creates and delivers pioneering solutions that transform the performance of the infrastructure ecosystem across the UK's transport, energy, water, and defence markets.
The Latest Contract Win
Yesterday the group announced that it is to be awarded a new contract by HS2 Ltd. as a sole supplier to deliver tunnel and lineside mechanical and electrical (M&E) systems for HS2, with a total contract value worth a minimum of £400m to Costain.
This contract, which is to be signed in due course, starts in Q1 2025 for a seven-year period, with the option for additional contract extensions.
The contract will see Costain deliver the design, supply, manufacture, installation, testing and commissioning of HS2's Tunnel and Lineside M&E systems during construction.
CEO Alex Vaughan stated that:
"Costain has a long-standing involvement with the UK's largest strategic infrastructure programme and this new contract is a testament to the strength of our collaborative and successful relationship with HS2.
Our teams will draw on their experience and expertise to deliver world-class systems, using the latest technology to drive efficiency."
The Equity
There are 268.77m shares in issue.
The larger holders include JO Hambro Capital Management (10.08%), Ennismore Fund Management (6.90%), Gresham House Asset Management (6.10%), Hargreaves Lansdown Asset Management (3.38%), Artemis Investment Management (3.13%), FIL Investment Advisors (2.94%), KBI Global Investors (2.68%), Amundi Asset Management (2.09%) and CACEIS Bank SA (2.09%).
Analysts View
Ahead of yesterday’s contract news analysts – Joe Brent, Alex O’Hanlon and Sanjay Vidyarthi – at Panmure Liberum were calling this group’s shares out as a Buy, looking for a 135p in due course.
Their estimates for the current year to the end of this month are for slightly reduced revenues at £1,248m (£1,332m), but with adjusted pre-tax profits of £46.5m (£44.2m), lifting earnings to 12.4p (11.9p) and paying a maintained dividend of 1.2p per share.
For next year they see £1,260m of revenues, with a far better profit of £52.1m, pushing earnings up to 14.3p and its dividend to 1.4p per share.
Based upon its massive Order Book the brokers are looking for £1,275m in sales in 2026, with £56.7m profits, worth 15.5p in earnings and paying a 1.6p dividend per share.
It is well worth noting the analyst estimates for the group’s end-of-year cash balances – 2024 £158.1m, for 2025 £189.4m, and for end-2026 a massive £220.8m in cash.
In My View
Way back on Tuesday 20th August I wrote that:
“Costain Group shares, at 89p, are far too cheap considering that they are on just 7.24 times current year price-to-earnings, while the group should end the year with around £164m of cash on its balance sheet, compared to its current £245m capitalisation.”
While the share price and other values have changed, my opinion about the company and its massive potential have not altered at all.
In fact, with the latest contract win, I am even more convinced that this group’s shares, now 104.50p, are undervalued and very capable of rising a good 25% in 2025.
Valued at £280m today, it must be running at around £150m plus in cash, with its shares trading on 8.4 times current year earnings and on just 7.3 times prospective – they really are CHEAP.
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