Costain could teach Irish construction firms a few lessons
Published 05/05/2014 | 02:30
OVER the years the one reliable prediction for the building sector was boom and bust.
In Ireland, the present collapse has been spectacularly awful for builders, but even in normal times construction seemed always to promise mountains of profit followed by an inevitable descent into falling demand and big losses. Leveling off the peaks and troughs was the great challenge that seemed so difficult to master.
However, the more I look at the current thinking in the big international construction firms, the more I think they might have an answer to the problem.
The company we are analysing this week, the British Costain Group, is a case in point. It is an international civil-engineering and construction group, providing specialist services mainly in the UK, but also in Europe and Middle East. It is currently valued at £270m (€328m).
Over the last 20 years Costain has been transformed. No longer a building contractor, it is now a one-stop shop providing planning, project delivery and maintenance for any proposed construction project.
I hate the phrase – borrowed from the technology sector – but Costain is now a 'construction solution provider'.
The company is not paid the traditional lump sum. Instead, it agrees the target cost with the client. If Costain delivers below the agreed price, the savings are shared and any cost overruns are divided.
This approach is less risky for both parties and can also be more lucrative. The negative from Costain's viewpoint is that it can be a drain on cash flow.
However, it appears to be a system that is working out well for the British group as most of its order book is repeat business.
This approach, together with targeting spending sectors, such as rail, water and nuclear waste, is helping profits too and the Costain order book is a record £3bn (€3.6bn), up from £2.4bn the previous year.
The company started life as a traditional building company and was established as far back as 1865.
It was once the UK's largest house builder. Costain was an early provider of infrastructure in the Middle East, especially Iran, and after the first oil shock it returned to the Emirates to soak up the petro-dollars.
Perhaps it was most famous for being part of the origin consortium picked to build the Channel Tunnel from England to France. It also had businesses in America, some star-crossed, such as an unfortunate methane gas explosion in the Costain-owned coal mine in Kentucky in 1989, which killed 10 miners. This was one of the factors which forced Costain to sell assets and revert to its original construction business.
In the last two years, the company has restructured, reducing its divisions from four to two. It sold some assets and had a successful placing. Its two remaining divisions are infrastructure and natural resources.
Infrastructure includes rail, roads and power and airport projects. This division generated £560m (€681m) in revenue last year and has an order book of £2bn (€2.4bn).
Among its projects are the redevelopment of London Bridge, the Hammersmith Flyover and the Crossrail project.
The natural resources section includes water, chemicals and nuclear waste processing.
This division has a turnover of £400m (€486m). One of the tricky jobs it has on its books is the decommissioning of Sellafield Nuclear Station. During the year Costain disposed of its minority stakes in Severn Water, realising £9m. However, its abandoned merger with another construction company, May Gurney, cost Costain £3m in fees.
The group's revenue last year was £960m, up 3pc on the previous year. Operating profits of £27m (€32.8m) were up 12pc on the previous year.
In the past four years revenue has remained static but pre-tax profits have increased 50pc, which says something about efficiency. It has a comfortable cash position and recently had a successful placing of £75m to take advantage of 'growing opportunities'.
The share price is 267p – almost half its record high of 500p seven years ago but above its yearly low of 227p. Its price to earnings ratio is 15 and it is one of those companies that looks after the interests of its shareholders.
Its dividends have increased each year for the last seven years. That's the sort of outfit I like.
Nothing published in this section should be taken as a recommendation, either implicit of explicit, to buy or sell any of the shares mentioned