Costain (COST)

Price: 64.8p. Gain to date: 18.7%

Original BUY @ 54.58p on 31 August 2023

When we recommended buying shares in infrastructure and engineering group Costain (COST) we flagged its superior revenue and earnings visibility, thanks to the size of its order book and the security of its customers, which tend to be county councils and major utilities.

We also suggested the firm’s lowly valuation, its large cash pile, and the fact free cash flow had improved to the point where the board might contemplate restarting dividends meant the shares wouldn’t stay cheap for long.

WHAT HAS HAPPENED SINCE WE SAID TO BUY

Sure enough, within a week the firm declared a 0.4p per share interim dividend, its first payout to shareholders since before the pandemic.

Also in September, the firm was appointed by water company Severn Trent (SVT) as part of its Capital Delivery Framework, just a couple of months after it was appointed as a Managed Service Provider for a further two years by United Utilities [UU.).

The United Utilities work is its first under AMP8, the latest five-year asset management period for the water industry, and Costain expects to see considerable growth in this area going forward.

WHAT SHOULD INVESTORS DO NOW?

The firm’s full-year results won’t be released until next March, but the current consensus is for sales of £1.37 billion and EPS (earnings per share) of 10.8p, which puts the shares on a current PE of six times.

Meanwhile, analysts are forecasting the group will have a net cash pile of £128 million at the end of 2023, rising to £150 million in 2024, which given its market cap is just £180 million means the operating business is currently valued at £52 million or less than two times earnings.

We are confident this undervaluation won’t last long – either the market will see to it, or private equity buyers will swoop in and take advantage of the prodigious cash flow the firm generates, so we remain bullish.

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