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Why this evolving company could be the perfect share to hold

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These days, Costain Group (LSE: COST) describes itself as a “smart infrastructure solutions company.”  But six years ago, it called itself “one of the UK’s leading engineering solutions providers, delivering integrated consulting, project delivery and operations and maintenance services.”  And 12 years ago, the firm was happy to be known as an international engineering and construction group.”

Evolving to survive and thrive

In today’s half-year results report, the firm explains that it is evolving into the UK’s “leading” smart infrastructure solutions company and the directors are aligning the firm with the “fast-changing” market environment, which I reckon is good news. All businesses need to adapt and modify operations over time in order to survive and thrive. Those that don’t often end up going down the tubes.

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Costain asserts that it is differentiating its customer offering from those of its competitors by providing the range of integrated technology-enabled services increasingly required by its clients. The firm is making decent progress with its metamorphosis and plans to expand into a new enlarged technology centre. Around 33% of the staff are now employed in consultancy and technology roles, and Costain reckons its focused approach enhances its market position and growth prospects.

Today’s construction projects are complicated endeavours and the business aims to be well-equipped, now and in the future, to meet the challenges head-on in its traditional sectors of rail, highways, power, water nuclear, oil and gas. The plan seems to be working and today’s interim figures are good with underlying operating profit just under 7.5% higher than the equivalent period a year ago while underlying earnings per share are up just over 15%. The directors expressed their confidence in the outlook by pushing up the interim dividend a little over 8%.

Building a higher quality order book

Looking forward, the “higher quality” order book stands at £3.7bn and 90% of that the company classifies as repeat business, which bodes well for the stability of cash inflow and the ongoing prospects for the dividend. Chief executive Andrew Wyllie said in today’s report that “we are on course to deliver full-year results in line with the Board’s expectations.” City analysts following the firm have pencilled in a 17.5% increase in normalised earnings this year and a 7% uplift in 2019.

If you look at indicators for value, quality and momentum, Costain looks like the perfect share to hold in many ways. Among the attractions are a low-looking forward price-to-earnings ratio of just over 11 for 2019, a return on capital running just below 20 and a record of rising revenue and earnings over the past few years. On the flip side, there’s no doubt that the world of major construction and infrastructure projects will have a large element of cyclicality to it. But unless you are expecting a major crash in  Britain’s economy soon, which I’m not, Costain looks like a highly investable stock. Indeed, the consensus among City analysts right now is that it is a ‘strong buy’ and I’m not going to argue with that assessment.

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Kevin Godbold 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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