The Costain share price has crashed – is it now time to buy?

The Costain share price has fallen more than 80% over the last 18 months. But that’s not enough reason to buy these shares, writes Thomas Carr.

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In the last 18 months, the Costain (LSE: COST) share price has fallen by more than 80%. The smart infrastructure solutions company has been beset by one problem after another. The group reported a small loss last year, and barring a miracle, looks set to report a much bigger loss this year.

In Monday’s disastrous first-half results, Costain reported an operating loss of £90m. Reported revenues were more than 20% below those of the year before. Some of this can be attributed to Covid-19, which has disrupted operations and affected profitability. But most of it comes down to a couple of exceptional items, namely issues with two major contracts.

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Contractual issues hit the Costain share price

Together, these contractual problems have cost the group around £90m in lost revenue. In both these instances, there is the possibility that costs may be recouped. In fact, I think some of it will be. The problem is that these exceptional items have come so soon after last year’s exceptional items. If they start to become a regular occurrence, then they are no longer exceptional.

The thing is, Costain is actually not short of work. The group has a £4.2bn order book, with getting on for £1bn of that confirmed for next year. But what’s the point of doing work, if you can’t do it profitably. Operating margins for the group’s traditional complex delivery programmes are as low as 2%. This leaves very little room for manoeuvre. Anything but perfect execution results in a loss.

This is why Costain is now focusing on higher-margin consultancy services, with a particular interest in digital solutions. It sounds good, in theory, but whether it plays out in practice remains to be seen. More and more companies seem to be jumping on the digital solutions bandwagon. Success depends on there being enough work to go round.

It’s not all bad

Despite the negatives, Costain does have some strong tailwinds too. Its highways solutions have benefited from renewed investment commitments from the UK government. Infrastructure projects, like HS2, will be an important tool in kick-starting any economic recovery. In March, the government committed to investing £600bn in UK infrastructure over the next five years. Costain also looks set to benefit from the move towards a carbon-free society after developing its decarbonisation solutions. The group is involved in several noteworthy projects, involving carbon capture and storage, hydrogen and biogas.

Its recent equity raising diluted the ownership of existing shareholders and sent the Costain share price sharply downward. But it also gave the company a much-needed infusion of cash. Net cash now stands at around £140m and the balance sheet looks healthy.

Ultimately, I think Costain will be successful in its move into digital consultancy. But I don’t know how long the transition is going to take, or how bumpy the ride will be for its shareholders. It’s hard to see how the ‘new’ company will compare to the one we see today. The new Costain might be smaller but more profitable. With this uncertainty, I would steer away from the shares at this moment in time. While there is plenty of scope for the Costain share price to move upwards, I think there are much better companies to invest in.

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Thomas has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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