There is nothing like the whiff of a dividend to set investors’ adrenaline pumping, even from, well, a mixed set of results. That is what the builder Costain delivered on Wednesday, and the package has been well received since. The shares jumped from 46½p on Tuesday — ahead of the official announcement — to nearly 53p at one stage yesterday. They are coming out of intensive care, where they have lain since the pandemic, so it may be time to examine the company anew.
The group was once heavily into housebuilding but, as results elsewhere have shown recently, exiting that was probably a smart move. However, it has instead chosen to deal with the often less predictable vagaries of Whitehall. It plunged into losses in 2019 after losing a National Grid contract and forfeiting City confidence.
The political risk is rammed home by the HS2 rail project. This government has imposed a two-year delay and the run-up to the general election will mean other decisions being put off, but Labour seems to generally support Costain’s contracts, subject to funding.
The latest half-year results show revenue virtually unchanged from a year ago, at £665 million, boosted by higher interest on bank balances. That has turned into an adjusted pre-tax profit £2.6 million higher at £15.9 million. Earnings per share are up from 3.9p to 4.4p. Crucially for the dividend debate, cash balances have risen in the past year from £95.9 million to £132.1 million. And at least £623 million of revenue has been secured for the rest of this year, probably 90 per cent of what will transpire. By cutting pension fund contributions from £12 million a year to £3 million and nailing down banking facilities, the group can see hotter cashflow.
As Costain has not paid a dividend since a 3.8p half-timer in 2019, news of a relaxation sparked jubilation. The plan is to go for one third of annual dividends at the interim stage, another two thirds after the year-end. The management will not want this to be a one-off, but the start of a fresh sequence of payments stretching years ahead.
Although HS2 has focused attention on the group’s transport division, easily the biggest, it is also in water, energy and defence, all highly political. Rail revenues were 18 per cent higher, while roads fell 15.6 per cent as motorway contracts were completed and/or delayed.
On paper it looks as if energy fell 12.1 per cent in the half-year, while defence and nuclear rose 26.6 per cent, but that is largely cosmetic because nuclear has been moved from the energy column to defence.
As the group works for most of the big water suppliers, it should have plenty to do in the next few years as pressure grows to improve efficiency and reduce pollution. In the defence sector, Costain has climbed aboard the government’s Magnox programme, cleaning and decommissioning nuclear plants.
So there is plenty going on, and signs that the current management is getting to grips with the headaches that have plagued the group in recent years. However, the comparison with the near-rival Balfour Beatty is instructive: both are in HS2, but Balfour is valued by the stock market at ten times Costain, on revenues five times larger and much more widely spread, including to the US. Balfour has paid dividends through and since Covid. But this is a reverse beauty parade. It begins to look increasingly that Costain, the ugly duckling, has been shamefully neglected by the stock market, leaving the share price appearing anomalous and set for recovery.
On the back of pre-tax profits rising from £40 million-or-so this year, they should get close to £50 million for 2025. At current levels, the shares are trading on less than four times earnings two years hence, while the dividend yield is set to rise to about 2.8 per cent. That p/e ratio must surely blossom.
ADVICE Buy
WHY Unjustifiably overlooked after a long period in the doldrums
Macfarlane Group
Packaging is not a great business to be in these days, because manufacturers are not making as much to be packaged in tough times, as yesterday’s CBI distributive trades survey emphasised.
So Macfarlane’s revenue edged up only 2 per cent to £141.6 million in the latest half-year, despite another three acquisitions. But pre-tax profit rose by 13 per cent to £9.9 million, boosting the profit margin by squeezing supplier prices and cutting flab from bought businesses. Inventories fell from £25.1 million to £19.9 million, helping to improve cashflow from £6.5 million a year ago to £20.3 million.
The company distributes protective packaging and itself makes high-value packaging for the defence, aerospace, medical equipment and electronics industries, among others. Distribution accounts for the bulk of the business, with virtually unchanged half-year revenue of £123 million. That took that division’s operating profit up from £7.5 million to £7.9 million, a 6.4 per cent margin. Consumers’ growing fondness for online shopping means that fancy shop packaging is less popular.
There are plenty more acquisitions to go for in a fragmented industry but it is a seductive drug. Rather than a straightforward packaging business, investors have effectively been buying into a financial processor of undermanaged businesses, slashing costs, piling up goodwill and boosting earnings per share. The bulk of the group’s £143.8 million non-current assets consist of £86.5 million goodwill and £35.2 million in “right of use” assets, or leases. That is more than the £111 million figure for total net assets.
The company maintains expectations for the full year, making the shares a worthwhile way of betting on economic recovery. The interim dividend was 4 per cent higher, at 0.94p, while earnings per share grew 9 per cent to 4.74p. That means it has already covered last year’s 3.42p total payout, making an increase to 3.5p this time a fair bet for a 3.1 per cent yield. The shares have stayed between 105p and 120p this year, and that should continue.
ADVICE Hold
WHY Solid income share, showing steady performance
