Infrastructure contractor Costain Group (LSE: COST) has been through a tough time lately, but it’s motoring today, up 10% despite reporting a drop in interim profits. The group said it’s on track to meet revised full-year expectations, previously announced in June, which should see operating profits ranging £38m-£42m.
Costain benefit analysis
This is a small company with a market-cap of just £173m, but one with a really punchy dividend. Right now, it yields more than 10%, with healthy cover equivalent to 2.5 times earnings. It’s also trading at an incredibly low valuation of 5.3 times forecast earnings, which looks like a really exciting opportunity. You won’t be surprised to hear it comes with a bit of risk as well. There are other small-cap contrarian stocks worth looking at too.
Today’s report, for the half-year to 30 June, showed a small drop in underlying operating profit to £21.2m, from £23.2m last year. Markets expected a dip and chose to focus on the positives, such as the improvement in overall divisional operating margin, which climbed from 3.5% to 4%.
The group also reported strong momentum in securing new work, with £1.1bn of fresh contract awards and extensions to existing contracts during the first half. At 30 June, the order book stood at £4.2bn, a rise of 13.5% year-on-year, while revenue secured for 2020 stood at £900m, some £50m more than last year.
Costain claims a robust balance sheet, with total net assets of £178.4m, including net cash of £40.8m, and a positive current asset ratio. During the first half of the year, its average month-end net cash balance stood at £63.7m, although that was down from £90.8m last year.
Today’s results include a one-off charge of £9.7m to fix a roof after the responsible subcontractor went into administration in November 2017, although this doesn’t appear in underlying numbers.
Taking the lead
CEO Alex Vaughan is driving the group’s new “Leading Edge” strategy, accelerating the group’s deployment of higher margin services “through leveraging our strong client relationships and reputation for complex programme delivery.” The aim is to deliver a blended divisional margin range of 6-7% over the medium term.
Costain is fighting back after announcing contract delays and cancellations, which included high-profile projects such as the M6 Smart Motorway, Preston distributor road, and HS2 Southern Section, while the Welsh government cancelled an upgrade to the M4 motorway at Newport.
The Costain share price is down 55% in the last three months as a result. So that explains why a company with this kind of market-cap pays such a whopping dividend. City analysts expect the yield to fall to 7.3%, which is more than respectable, and has healthy cover of 2.5. There’s scope for progression, with a forecast rise to 8.3% in 2020. Earnings should start to recover in 2020 as well, although the predicted £1.24bn will remain well below 2017’s £1.68bn.
Costain’s strong balance sheet and healthy order book should encourage investors after two dismal years. Its recovery could have further to run, provided you understand the risks.
Markets around the world are reeling from the coronavirus pandemic…
And with so many great companies trading at what look to be ‘discount-bin’ prices, now could be the time for savvy investors to snap up some potential bargains.
But whether you’re a newbie investor or a seasoned pro, deciding which stocks to add to your shopping list can be daunting prospect during such unprecedented times.
Fortunately, The Motley Fool is here to help: our UK Chief Investment Officer and his analyst team have short-listed five companies that they believe STILL boast significant long-term growth prospects despite the global lock-down…
You see, here at The Motley Fool we don’t believe “over-trading” is the right path to financial freedom in retirement; instead, we advocate buying and holding (for AT LEAST three to five years) 15 or more quality companies, with shareholder-focused management teams at the helm.
That’s why we’re sharing the names of all five of these companies in a special investing report that you can download today for FREE. If you’re 50 or over, we believe these stocks could be a great fit for any well-diversified portfolio, and that you can consider building a position in all five right away.
Harvey Jones 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.