My favourite UK growth stock is having a moment, jumping more than 11% in early trading after some terrific news.
The stock in question is Costain (LSE: COST), the engineering and construction group that’s transformed itself from a former penny share into a serious FTSE 250 contender.
When a company of this size announces it’s landed a £1bn contract, the earth moves. Or at least, it shakes a little.
Today (13 October), Costain revealed it’s been chosen by Sellafield as its utilities delivery partner, a major part of the site’s Infrastructure Delivery Partnership.
The shares are flying
The nine-year deal, potentially extendable by another six, will see Costain refurbish and replace complex utility systems to support Sellafield’s nuclear decommissioning.
Chief executive Alex Vaughan called the award “testament to our strategy of developing long-term relationships with tier 1 customers”. He’s happy. I’m happy too. This is exactly the kind of steady, high-value contract that helps build lasting shareholder confidence.
Long road to recovery
Costain’s comeback has been remarkable. The shares are up 40% over the last year and 245% over five. However, there was plenty of turbulence over the summer.
On 20 August, investors had to swallow an 18% fall in half-year revenues to £525.4m. That came as road projects ended and HS2’s rephased schedule hit the books. The stock plunged more than 15% on the day.
Yet there were positives. Adjusted operating profit rose 3.1% to £16.8m, margins improved to 3.2%, and management reaffirmed confidence in hitting its 4.5% target next year. Net cash dipped to £144.9m, but that’s still a pretty big pile for a company with a £414m market cap. The interim dividend was hiked from 0.4p to 1p, which is a bumper 150% increase.
I never considered selling. I even toyed with averaging down. Now I wish I had. With today’s Sellafield win, I’m up more than 150% since adding it to my Self-Invested Personal Pension in November 2023.
Strong order book and revenues
Costain’s forward order book stands at £5.6bn, more than four times annual revenues. Around 90% of forecast revenue for the year is already secured, and management says bidding activity remains high.
Its focus on long-term infrastructure, nuclear, energy transition, transport, looks well aligned with government policy.
The shares trade on a modest price-to-earnings ratio of 9.6, still low for a business growing this fast. It also kicked off a £10m share buyback in June, and has a trailing dividend yield of 1.54%.
Risks remain. Infrastructure contracts require a steady stream of new wins to offset expiring contracts, there is always a danger management will underprice bids and costs run out of control, as happened before. A short-term risk is that profit-takers could move in after today’s surge. But I still think this looks like a stock investors who can withstand short-term volatility might consider buying, with a long-term view.
Today’s Sellafield contract win is priced in. Costain will have to deliver more earthshaking news to keep up the momentum, but I’m optimistic and have no intention of banking my profits today.
