Costain finishes H1 with more cash despite profit fall

Costain improved its net cash position in the first half (H1) of this year compared with H1 2022, despite a lower revenue, pre-tax profit and operating margin.

The firm had £132.1m in cash on 30 June, marking a 38 per cent year-on-year increase. Chief executive Alex Vaughan told Construction News that this was partly due to a review of Costain’s pension scheme: “We’ve significantly reduced the cash contributions that the business has got to make into its legacy defined pension scheme.”

Turnover for the six months ending 30 June reached £664.4m, down slightly from the £665.2m posted the year before, as the contractor sought to diversify from its focus on road schemes and HS2.

Pre-tax profit dropped from £11.2m to £8.5m, and Costain’s operating margin narrowed from 1.8 per cent to 1.1 per cent.

Vaughan noted that Costain would restore dividend payouts to shareholders. He said that profit and margin were more positive if one-off costs to drive business efficiency and invest in digital transformation were excluded.

He added that customers were buying less hardware and wanted more services. “That’s from our digital consultancy, our digital and operational twins and situation-intelligence capability – that piece has been growing,” Vaughan said.

He emphasised growth in demand from the water, energy, defence and nuclear sectors as examples of “markets where discretionary investment isn’t needed”.

Vaughan added: “We’ve got a diversifying customer base that underpins the resilience of the business.”

Contract wins in H1 included a place on the Magnox framework to deliver its nuclear decommissioning programme and, in July, Costain was selected by United Utilities as the managed service provider in the AMP8 framework for a further two years.

The firm also won business from Heathrow and Manchester airports in H1 this year, plus about £9m in defence contracts from Babcock and the Atomic Weapons Establishment.

However, Vaughan acknowledged that Costain’s road and rail programmes had experienced “short-term rephasing”.

Costain was the largest recipient of National Highways spending in each of the past two financial years, and received £522.4m in 2022/23. Vaughan emphasised that the firm had six live delivery contracts with National Highways, such as work with Mott MacDonald as delivery assurance partner for the A303 Amesbury to Berwick Down upgrade.

However, in May, a job to upgrade barriers on the M62 was cancelled and, soon afterward, the firm left the £1.3bn Northern Trans-Pennine project to upgrade the A66.

In terms of rail projects, Costain is part of the SCS joint venture with Skanska and Strabag that is responsible for building the Euston Tunnel in London, as part of the main-works civils contract for HS2. But, in April this year, client HS2 Ltd said construction of the 7.2km tunnel between Euston and Old Oak Common would not begin in 2024 as previously planned.

SCS last month obtained an additional £305.3m from HS2 Ltd for HS2 phase-one works, to cover planned and agreed changes in the scope of the project. “We’re working to a revised programme and budget, and we’re delivering through that,” Vaughan said. “On HS2, there have been three bids that have been delayed as part of the rephasing of the programme.”

Rephasing of transport projects was partly responsible for a slightly lower order book of £2.5bn, compared with £2.7bn at the end of H1 2022. In an analysts’ note, Investec stated that Costain’s management team were “comfortable” with the order book and had 90 per cent visibility on full-year revenue.

“With high levels of bidding activity across the group, a ramp-up in order-book levels is anticipated,” Investec added.

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