More upgrades for ‘too cheap’ projects firm

The strong run by Costain Group (LSE:COST) shares has been backed to continue after results today helped the infrastructure projects firm touch the £1 level for the time since the pandemic.

The FTSE All-Share company, which serves the nationally important sectors of water, defence, energy and transport, has more than doubled in value over the past year.

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It lifted another 5.5p in early dealings today, having just reported a 22% rise in half-year profits to more than City expectations at £19.4 million. Earnings improved 27.3% to 5.6p a share.

The group’s forward work position stood at £4.3 billion, up from £3.9 billion at the end of 2023 and equivalent to three times its annual revenues.

This is before £500 million of new work in the water sector as it builds on long-standing relationships to help deliver utility firms’ latest five-year investment programmes.

In the transport sector, the business recently completed a major project at Gatwick station and is supporting the retrofit of emergency areas on the M1.

Chief executive Alex Vaughan said: “We operate in growth markets meeting critical national needs, providing essential national infrastructure through delivering services that shape, create and deliver our customers’ needs.”

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While mindful of economic and geopolitical conditions and their impact on government spending priorities, he added that his company was “well positioned” for cash generation and growth in profits.

Other highlights in his presentation included an adjusted operating margin run-rate of 3.5% over the course of 2024, in line with an ambition to deliver margins in excess of 5%.

Meanwhile, a strong cash balance of £166 million and pension surplus unlocked a £10 million share buyback programme. Having resumed dividends last year, Costain also intends to pay an unchanged 0.4p a share on 18 October.

House broker Panmure Liberum lifted its price target to 135p following the results, believing that the valuation is “simply too cheap” given exposure to the UK’s strong infrastructure outlook and the energy challenges of security, sustainability and affordability.

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Broker Peel Hunt reiterated its “Buy“ recommendation and raised its price target from 95p to 115p. It believes a current valuation of 6.7 times forecast 2025 earnings fails to reflect the “strengthening opportunity and balance sheet”.

It said: “Costain is in the early stages of delivering its strategic goals and markets remain supportive.”

The broker is encouraged by evidence that the once-largest market of Roads is starting to stabilise alongside progress in Rail. It notes the valuation is underpinned by the net cash position, which represents 60% of the current market capitalisation.

Investec Securities, which also has a 115p target price, said it was impressed by the company’s margin progress.

It added: “A very strong forward work position, with good momentum in the Water sector particularly, provides good visibility with the group on track to deliver its medium-term margin targets.”