Costain (COST) 82.4p

Market cap: £225 million

Gain to date: 50.9% 

As we said in August last year when we recommended FTSE 250 engineering and infrastructure group Costain (COST), it’s not often we come across companies on single-digit multiples of earnings with large cash piles, and our bet has paid off nicely.

Many will argue the shares are still cheap, and we wouldn’t necessarily argue, but we aren’t sure what is going to drive the re-rating further and at the end of the day Costain is a low-margin business with limited growth potential.

WHAT HAS HAPPENED SINCE WE SAID BUY?

The firm posted a 6% drop in revenue for 2023 but said its order book swelled to three times annual turnover and it had ‘an excellent pipeline of opportunities’ and was driving ‘high levels of tendering activity’.

Earnings per share were up 23%, helped by interest income on its £164 million of net cash, and the company returned to the dividend list with a total payout of 1.2p per share.

The operating margin rose from 2% to 3%, and analysts are hopeful it could approach 4% this year, but we can’t get excited about a business which is probably making a better return on its cash than it is from its operations.

WHAT SHOULD INVESTORS DO NOW?

As we flagged last year, analysts at Liberum had a price target of 80p, which has now been reached, but given its large cash pile and its steady cash flow generation the firm must surely be on the radar of rivals or private equity so we certainly can’t rule out a bid at a premium to today’s price.

However, given the fact the shares have gone up 50% while adjusted earnings per share have risen less than half that amount, and the forecast for next year is for growth to slow to half last year’s rate, we feel the time is right to count our blessings, cash in and move on.

‹ Previous2024-05-23Next ›