Costain builds record order book

There is no escaping Brexit. It's dominated news flow since last week's European Union (EU) referendum, and will continue to do so. The collapse of the banks and housebuilders was expected, but the speed of the recovery was not. Many shares are back at pre-vote levels - hell, the FTSE 100 is above it! Nestled within these knock-out performers is Costain, a construction company that doesn't look expensive and boasts of a 5% dividend yield.

In a brief update ahead of interim results on 24 August, Costain tells us it has a record order book worth £3.9 billion, up 5% on this time last year, and is on course to meet full-year expectations.

It's also testament to a business overhaul, and supplying big customers working on major projects, "underpinned by legislation and regulation in the UK, upgrading and renewing the country's energy, water and transportation infrastructures".

With 90% of its chunky order book from repeat customers, they're clearly happy with the better service. We will find out more in August. The revamp has also helped it win preferred bidder status on over £400 million of contracts, although that is down from £500 million last year.

As with most pre-close statements, the update was light on forecasts. Helpfully, house broker Liberum has pulled together some numbers. It's confident Costain will generate earnings per share (EPS) of 10.4p in the first half, although this should ramp up in the second six months. An infrastructure margin of 3.6% is also way below the 4-5% full-year target. Still, short-term guidance is broadly unchanged, despite the uncertainties related to the UK's decision to leave the EU.

"Whilst we expect an infrastructure slowdown in the short term due to political uncertainty as a result of Brexit, we believe the need for better UK infrastructure is real and Brexit may in time lead the government to adopt monetary finance/fiscal quantitative easing which could be positive," explains Liberum analyst Joe Brent.

"Given that Costain is principally exposed to UK regulatory cycle and should therefore have limited exposure to GDP weakness or political uncertainty we left our estimates broadly unchanged."

The red pen

However, a red pen has made its way into 2018 forecasts and infrastructure growth estimates fall from 4% to 0% due to expected political uncertainty. At least the group has a strong balance sheet, with net cash of £89 million expected to be on the books in August's results, although there will be a £20 million working capital outflow. By the end of the year, net cash should total £88.7 million, which will not only help it navigate rocky markets, but make the group attractive to a trade buyer.

Sales of £1.4 billion are expected in 2016, along with cash profit of £42.4 million, giving EPS of 26.3p. Using these forecasts, Costain shares trade on 12 times forward earnings and offer a prospective yield of 3.8%. The price/earnings (PE) multiple falls to 10.6 times in 2017 and 10 times in 2018, with a yield of 4.3% growing to 5%.

Costain's share price slipped 23% in the two trading sessions following the European referendum to a two-year low, but the shares have quickly recovered 20% since to 318p and close to pre-Brexit levels.

As one of Liberum's key buys in the construction space, Brent reckons the shares are worth 405p - 26% more than Thursday's intra-day high of 321p.

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser