Costain appears to be about as popular with the City as England goalkeeper Rob Green is with the country’s football fans. Yet to me this aversion is misplaced. While the company hasn’t been blowing its own trumpet, the reality is that it has been quietly moving ahead without dropping a single ball.
Indeed, every time the board makes an announcement the story is the same. Profits, revenues and the dividend are always up, and just for good measure, there is usually a smattering of new blue-chip clients thrown in, secured on long-term deals. May’s trading statement was no different. The order book (£2.6bn) and preferred bidder positions (£600m) closed at record levels, along with more than 90% of revenues already bagged for 2010.
Better still, the group had £100m of net cash as at the end of April, as well as a private finance initiative (PFI) portfolio worth £44m. And it said that it is well placed to weather the forthcoming public-sector spending reviews.
This is because the British contractor focuses on working for customers who are committed to massive capital infrastructure programmes – such as clients within the water, energy, waste and transportation sectors. In fact, in light of its excellent 140-year pedigree, Costain sits at the top table of the industry alongside peers Balfour Beatty and Carillion. The group has demonstrated time and again that it can win prestigious new contracts, such as building the Channel Tunnel Rail Link, Thames Barrier, St Pancras station and London’s Crossrail line.
Costain (LSE: COST)
What’s more, chief executive Andrew Wyllie is successfully moving the group up the value chain. By 2014, his aim is for the company to be generating 15% of its revenues from consulting and 25% from maintenance, with the balance coming from construction. In terms of the numbers, analysts are forecasting 2010 sales and underlying earnings per share of £1.3bn and 22.9p respectively, together with paying a 9.5p dividend. That puts the shares on an attractive p/e ratio of 8.7, with a 4.8% dividend yield.
Sure, there is a £75m pension deficit (net of tax) to watch – albeit the scheme has recently been closed to all members. Assuming a six times Ebita multiple and adding back the cash/PFI stakes, then Costain is worth 300p a share of anybody’s money. So despite the concerns over the government’s finances, on top of the generic risks associated with non-performing contracts, Costain looks like one to tuck away. Arbuthnot rates the stock as a strong buy, with a £4 price target.
Recommendation: speculative BUY at 200p (market capitalisation £124m)
• Paul Hill also writes a weekly share-tipping newsletter, Precision Guided Investments