Costain (COST) 69.6p

Gain to date: 27.5%

We flagged infrastructure and engineering specialist Costain (COST) in late August 2023 at around 55p on the basis a lowly valuation, strong balance sheet and the prospect of a return to the dividend list would eventually be seized on by the market.

WHAT HAS HAPPENED SINCE WE SAID TO BUY?

We are gradually being proved right. The company declared a dividend for the first time since the pandemic alongside first-half results in September 2023, and followed that up in short order with the award of some key contracts in the water utilities space.

It’s full-year results on 12 March painted a picture of a business very much on the up as margin progress helped drive profit higher.

The operating margin was up 40 basis points to 3% supporting adjusted operating profit up 10.5% to £40.1 million, while statutory profit was lower thanks to the costs of a continuing shake-up at the company. The longer-term ambition is to grow margins to 5%. Revenue was down 6.3% but this was thanks to the timing of projects in the transportation sector.  

The strong financial performance underpinned a 0.8p final dividend, and the company noted it had more than 80% of expected revenue secured for 2024 with forward work in the pipeline standing at around three times 2023 revenue.

WHAT SHOULD INVESTORS DO NOW?

The company is still sitting on an enviable balance sheet, with adjusted free cash flow of £72 million helping drive net cash to £164.4 million – for context this is 86% of the current market valuation.

This gives it considerable flexibility, including scope for M&A to augment growth, and its focus on areas of strategic priority for the UK should mitigate the risks posed by economic uncertainty and strained public finances.

Financial strength and robust demand should also enable further generosity to shareholders through dividends and potentially share buybacks. These attractions are not reflected in a price-to-earnings ratio of just 6.4 times. 

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