Costain is a totally different company from the accident-prone builder some may remember from a few years ago, but the market may be having difficulty appreciating this. The group is best seen as a pure play on spending on the UK’s infrastructure and in areas such as energy, transport and water where such spending, including maintaining the capital’s bridges, tunnels and roads, is pretty much pledged to go ahead.
Costain believes its big infrastructure customers are having to spend £20 billion a year in all, while its revenues are running at about £1.5 billion a year, which gives an indication of the potential for growth.
In all, 90 per cent of the work won was repeat contracts, from customers happy to hire Costain again. As ever with such businesses, be they outsourcers, contractors or engineers, the main metric to focus on is the amount of work won and potentially in the hopper. The latest trading statement makes it clear that Costain is managing to pull the new work in to replace those projects it has started on.
The order book remains at £3.9 billion, despite a 27 per cent rise in revenues at the halfway stage as new projects were started. Revenues secured for the next year were up on a year before, while the value of jobs where the company is the preferred bidder, a proxy for future revenues, remained at £500 million. The sort of margins such work is being done on remain at a healthy 4 to 5 per cent.
There was an outflow of working capital at the half year, which worried some, as a consequence of the extra work but this has reversed. The company had more than £100 million of net cash at the year end to go towards further infill acquisitions, such as the two specialist consultants bought over the past year or so.
The natural resources side, rather smaller than the infrastructure business, will register a loss for 2016 because of previous writedowns from a legacy waste project in Manchester taken on in 2007, but this would seem to be the end of the damage from this and no such work will be taken on again.
Costain shares, which were up 14 ¾ p at 371 ¾ p yesterday, sell on less than 14 times last year’s earnings. They look a good bet on UK infrastructure growth.
My advice Buy
Why Costain looks a good bet on continued spending on much-needed infrastructure, given the pedestrian share price performance
Cape
It is Cape’s misfortune that, while the company is doing about as well as any of the contractors serving the energy and natural resources sectors, legacy issues over decades-old asbestosis claims have come back to haunt it.
A court case brought by insurers will begin this month and Cape felt impelled, at the time of the last trading update in November, to paint a worst-case scenario that this could put the dividend at risk.
This is tricky because the yield on the shares, more than 7 per cent, was one factor providing support. Cape’s latest trading statement says that 2016 results in November, which were set to be “slightly” ahead of market forecasts, will be “materially ahead”.
This is because of the work won in the Asia-Pacific region on areas such as liquefied natural gas, which is less tied to wherever the oil and gas price may be. The company has won another contract at the Wheatstone LNG plant being built by Chevron in Western Australia. All this augurs well for 2017. The shares, up 26½p at 178½p, sell on little more than six times’ earnings. Worth a punt on the assumption that the dividend can be held.
My advice Buy
Why Shares look cheap if legal fallout is limited
PureCircle
The situation at PureCircle is weird, but this has always been one of the odder stocks on the London market, even if it did once have a market capitalisation of £1 billion.
The company makes stevia, a sweetener derived from a South American plant, and has been trying to get it adopted by the big drinks makers in place of sugar. It can also be bought in the supermarket here.
In May the US border authorites seized two shipments because of worries that they were being produced by convict labour in China’s Inner Mongolia province. The shipments were released after the company tried to give reassurances on their origin.
However, subsequent shipments were also impounded and the company is unable to supply the US, which accounts for a third of its sales. How long this will continue is anyone’s guess.
PureCircle has a June year end, and all this has impacted on this year’s numbers, hence the 10¾p fall in the share price to 240¼p. That fall does not look too horrendous because the shares have come back a long way and its market value is back to about £400 million. The company does not have any other products to sell, while growth is continuing as stevia achieves acceptance elsewhere.
Even before the fallout from the US, the shares did not trade on any meaningful multiple. Stevia is plainly a useful product and should continue to gain market share, but this column has warned against the shares before and the US difficulties only accentuate that warning.
My advice Avoid
Why The outcome in the US is too hard to call
And finally. . .
Strong monthly figures arrive from Nex Group, one of this column’s picks for the year. The company formerly known as Icap does well in times of market uncertainty, and trading at its EBS electronic platform was ahead by 20 per cent year on year in December. There was some slowdown since November, which had been boosted by the Trump presidential win, but doubts over US interest rates should provide some impetus. Michael Spencer, founder and chief executive, has been buying shares this week.
