10th Jan 2024. 9.03am
Regency View:
BUY Costain (COST)
- Value
Regency View:
BUY Costain (COST)
Costain: Digging deep for value in infrastructure innovation
In the world of investing, the term ‘deep value’ is often banded around with freedom. However, the efficiency of financial markets makes unearthing stocks with deep value very difficult.
Deep value has many definitions, but perhaps the purest indicator of deep value lies simply on a company’s balance sheet.
Costain (COST), a multifaceted infrastructure solutions provider, has a market cap of £176m. It has a debt free balance sheet with a net cash position of £132m (H1 23).
The business is profitable and free cashflow generative, so the strong balance sheet is only getting stronger. Combine this with a forward price-to-earnings ratio of just 5.5, a price-to-free cashflow of 3.4, and a discount to fair value of 47.9%, and its looks reasonable to assume that Costain offer eye-catching levels of value – deep value!
Costain’s revenue powerhouse – A tale of diverse streams
Costain is a highly diversified infrastructure solutions provider which has strong and stable revenue streams.
Their operations are divided into two main segments: Transportation and Natural Resources.
1. Transportation segment:
This arm of Costain operates within the road, rail, and integrated transport markets, accounting for a significant portion of their sales (73.6% in 2022). Services within this segment often involve large-scale projects related to infrastructure development, enhancements, and improvements in transportation networks.
2. Natural Resources segment:
Operating in the water, energy, and defence markets, this segment constitutes 26.4% of Costain’s 2022 sales. Within this sphere, the company provides a range of solutions including consultancy, digital technology implementation, climate change strategies, and complex program delivery.
Costain’s competitive advantage lies in its ability to integrate diverse expertise (construction, consultancy, digital) to provide holistic solutions. Additionally, the company’s emphasis on sustainability, innovation, and efficient project management helps it stand out in the infrastructure solutions market.
Costain’s strategic growth drivers
Costain’s growth strategy encompasses various key elements outlined in their reports and statements:
- Innovation and technology integration: The company emphasises innovation and technology integration across its operations. This approach is evident through their Transformation program, which aims to drive efficiency, enhance operational performance, and improve margins. Their focus on digital technology solutions further supports their growth trajectory.
- Consultancy services expansion: Costain leverages its consultancy and advisory expertise to fortify its market position. This strategic area of focus enables the company to offer comprehensive solutions to its clients, enhancing its value proposition and establishing stronger client relationships.
- Strategic contract wins: The company strategically secures contracts within its key sectors, signifying its ability to win and deliver on major projects. These wins, such as contracts in Water, Energy, and Defence, highlight Costain’s competitive advantage and growth potential within these markets.
- Future-proofing: Costain aims to future-proof its operations by aligning with sustainability initiatives and trends. The company’s focus on sustainability and the transition to clean, green energy aligns with market demands and positions them favourably in the evolving landscape of infrastructure and environmental solutions.
Dividends return: Costain’s financial renaissance
In recent months, Costain has taken a significant step toward affirming its financial health and confidence in its operational performance by reinstating dividend payments.
Following the half-year results announcement in August 2023, the company has declared an interim dividend of 0.4p per ordinary share for the period ending 30 June 2023.
This decision marked a pivotal moment for Costain, signifying a return to distributing dividends after a hiatus, showcasing the company’s positive financial outlook and robust performance during the period.
Costain’s robust financial resurgence extends beyond dividend reinstatement. With a debt-free balance sheet and a substantial net cash position of £132 million in the first half of 2023, the company has its strength back – reducing the risk of shareholder dilution and giving it a platform to self-fund growth.
Bull flag forming
On the price chart, Costain has a clear technical catalyst taking shape…
Prices have been carving out a broad series of higher swing lows for the last year and having burst higher in November, recent price action has seen the shares consolidate near recent highs.
This ‘high and tight’ consolidation is indicative of trend continuation, and we would expect the pattern to resolve in higher prices.
When viewed within the context of Costain’s lowly valuation and robust financial position, we believe the stock is set for a strong 2024.
Additional news:
This morning Costain announced that is has secured a major deal with Northumbrian Water Group worth potentially £670m over 12 years. They’ll upgrade water infrastructure in a 7-year initial term, potentially extending to 12 years. This aligns with significant investments in the water industry.
Costain also published an unscheduled trading update which showcased a positive 2023 performance, expecting profits in line with market predictions – with a net cash increasing to £164.4m. CEO Alex Vaughan emphasised their commitment to enhancing water infrastructure, supporting the region’s development and employment opportunities.
Disclaimer:
All content is provided for general information only and should not be construed as any form of advice or personal recommendation. The provision of this content is not regulated by the Financial Conduct Authority.