Yesterday’s Trading Update from the Costain Group illustrates just how cheap its shares are at only 95.50p, brokers Target Price 135p.

28.01.2025

Yesterday’s Trading Update from the Costain Group (LON:COST) surprised the market in its content, certainly enough to help to shoot its shares up 11.40% in response. 

And I consider that its shares at 95.50p are still very undervalued and that they should be bought by investors looking for capital growth. 

The Business 

This Maidenhead-based group, which can trace its roots back to 1865, is one of the UK’s leading construction and engineering companies.  

Although the group’s corporate history includes extensive housebuilding and mining activities, it is now focused on civil engineering and commercial construction projects.   

The base of the group’s strategy is that Costain helps to improve people’s lives by creating connected, sustainable infrastructure that enables people and the planet to thrive.   

It shapes, creates and delivers pioneering solutions that transform the performance of the infrastructure ecosystem across the UK’s transport, energy, water, and defence markets.  

The group operates in six main sectors – Rail, Integrated Transport, Road, Water, Energy, and Defence and Nuclear Energy. 

Rail – it delivers end-to-end asset lifecycle solutions across the entire railway, from major station projects to multi-disciplinary rail projects. 

Integrated Transport – it works with diverse customers spanning Aviation, Light Rail and Place to transform organisational performance and accelerate the transition to net zero. 

Road – it is a leading provider of end-to-end highway services, delivering technology-led solutions for its customers. 

Water – it is a leading provider of engineering solutions to UK water utility companies across the asset lifecycle. 

Energy – it supports the decarbonisation of the UK’s energy infrastructure by improving existing asset efficiency and life extension while leading the transition to a sustainable clean, green energy future. 

Defence and Nuclear Energy – it supports the strategic defence capabilities and energy resilience that protect and power the UK, its people, values, and interests. 

Yesterday’s Trading Update 

The group reported that the 2024 Trading Year to end-December was positive with its adjusted operating profit expected to be in line with market expectations and net cash at the end of the year in line with market consensus. 

It actually stated that the group’s year had finished strongly, having grown in its strategic Water and Rail markets. 

Costain saw a substantial increase of £1.5bn in its high-quality forward work position to £5.4bn (£3.9bn) at the end of FY 24.  

Together with growth on its existing frameworks and attractive levels of bidding activity, increased confidence in the group’s ability to deliver further growth in operating profits and margins. 

Recent Contract News 

As a sole supplier to deliver tunnel and lineside mechanical and electrical systems for HS2, the group has recently secured a total contract value worth a minimum of £400m.  

Costain will deliver the design, supply, manufacture, installation, testing and commissioning of HS2’s Tunnel and Lineside M&E systems during construction.  

This contract, which is to be signed in due course, for a seven-year period, with the option for additional contract extensions.  

The Equity  

There are 268.77m shares in issue.  

The larger holders include JO Hambro Capital Management (10.14%), Ennismore Fund Management (6.94%), Gresham House Asset Management (5.59%), Artemis Investment Management (3.15%), Hargreaves Lansdown Asset Management (3.05%), FIL Investment Advisors (2.98%), KBI Global Investors (2.70%), BlackRock Investment Management (2.26%), and Amundi Asset Management (2.10%).

Broker’s View 

After yesterday’s Trading Update analysts Joe Brent and Joseph Walker, at Panmure Liberum, were rating the group’s shares as a Buy, looking for 135p in due course.  

Their estimates for the year to end-December 2024 are for revenues of £1,248m (£1,332m), with adjusted pre-tax profits of £46.5m (£44.2m), earnings of 12.4p (11.9p) and a maintained dividend of 1.2p per share.  

For this year they see £1,260m of revenues, a better profit of £52.1m, increasing earnings to 14.3p and its dividend up to 1.4p per share.  

The brokers are looking for £1,275m in sales in 2026, with £56.7m profits, worth 15.5p in earnings and paying a 1.6p dividend per share.  

It is well worth noting the analyst estimates for the group’s end-of-year cash balances – 2024 £158.1m, for 2025 £189.4m, and for end-2026 a massive £220.8m in cash.  

My View 

This group’s shares are extremely attractive at these levels. 

Masses of business already contracted while its pipeline of future projects to go for helps to bolster confidence in its future prospects. 

Capitalised at £256m, with some £158m of estimated 2024 year-end cash, this group’s undervaluation will eventually be corrected. 

I see its shares, now at 95.50p, very soon climbing back up to the 111.50p achieved at the end of last year. 

And then I see them heading higher, to trade in the 105p to 120p range. 

(Profile 05.09.19 @ 155p set a Target Price of 250p) 

(Profile 02.08.21 @ 55p set a Target Price of 69p*) 

(Profile 24.08.23 @ 50p set a Target Price of 62p*) 

(Asterisks * denote that Target Prices have been achieved since Profile publication)