The latest Investing Matters Podcast episode featuring Jeremy Skillington, CEO of Poolbeg Pharma has just been released. Listen here.
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Kenj and MAJ,
On the A465 project its hard to know what will happen. IMO they will agree to some form of financial settlement and clearly the Welsh government is anticipating this but in terms of value who knows.
Large Scale infrastructure projects like this are notoriously difficult and very risky. See the AWPR and the Queensferry crossing for Balfour Beatty and GT. The latter project has led to GT exiting large scale infrastructure projects all togther.
Exlcluding OJEU rules IMO there are only maybe 8 to 9 other firms with the scale and capabilities of costain to deliver large scale infra projects. All of them aside from BAM Nutall (technically has BAM Construct as a sister company) focus not just on infra but building as well. IMO this is only a good thing for Costain as they can demonstrate that they are pure specialists in this sector.
With regards to consultancy I agree that this is a highly profitable line of work. Your risk is virtually non existent, you don't have to build and you can just cream it from your staff rates. I used to work for Balfour Beatty at Major UK airport and a few years back we had an opportunity to carry out a Construction Manager role (rather than principal contractor) for a huge development project for a fee and effectively our profit from the contract would have been equal to the the profit from our normal construction revenue which was almost 6 times higher than the fee!
I think if you are looking to hold onto this for at least the next 18 to 24 months minimum then I think you are onto a winner. Expect a few bumps along the way though!
I may have made a mistake re the Government review. If the news of the outcome was in the papers, it was hidden among Covid-19 and Harry & Megan.
However, at least I was well informed enough to know that it was being reviewed, unlike you!
So speculation that was in fact untrue and you have only acknowledged your mistake now after you were challenged. Are you invested here Kenj? If not why are you dissing this every day? We all pretty much know it could fall or it could rise depending on news. Looks like the annual report isn't going down badly anyway.
"Pure speculation that they (government) would cancel longterm. "
It was far from speculation Trickymatters.
In January The Government launched a review into the safety of using the hard shoulder as a live lane. This was as a result of a very critical Panorama program and concerns expressed by motoring associations. Many MP's were also calling for the whole Smart Motorway program to be scrapped.
However, I was unaware that the review had been concluded a couple of weeks ago (must have been buried in all the Covid-19 news). The program is going ahead, although with quite a few modifications, so Costain's work should continue.
Kenj, they have stopped work on some 'non essential ' projects because of the cv19 isolation strategy. Pure speculation that they (government) would cancel longterm. You don't seem to be appreciating the gravity of the situation we are in. They will have to take major steps to stimulate growth. They are extremely likely to follow through with their proposals in the budget. They will be under pressure to move away from fossil fuels and encourage investment in green industries. Costain are also well placed for carbon capture projects.
"and the vision and strategy that the exec board has is to move away from complex infrastructure to higher margin, less risky work - i.e. smart technology, not diggers by the side of the road. "
Slavetothewage,
That has been Costain's stated strategy for some time now, but it could come back to bite them in the bum. The Government have halted commissioning any new Smart Motorway upgrades, and it is possible that they could yet cancel the ones they have already started. I appreciate that Costain would be reimbursed for any cancelled contracts, but cancelling any further Smart upgrades would put as dent in their desired Smart business growth.
They are preferred bidder - the contracts haven't yet been signed and if they can't agree a price with the Client then they won't get the work - look at Taylor Woodrow on the A30 in Cornwall that Costain took. I work for the company, and the vision and strategy that the exec board has is to move away from complex infrastructure to higher margin, less risky work - i.e. smart technology, not diggers by the side of the road.
You are quite right to point out that the directors have taken a pay cut of 30% - 4 days after Kier put a blanket 20% reduction across all their staff, Balfour Beatty directors took a 30% hit as did O'Roukes. What wasn't reported in the press was that senior managers also took a 30% hit, and all staff earning more that £45k were hit by a 20% cut - all other staff have a 10% cut. And of course no COL rise, recruitment, promotions and so on.
While I agree that Costain aren't in danger yet, with only £40m in the bank, they are going to have to call on their agreed facilities fairy soon - the £80m in the project bank accounts can't be released as the subbies have to be paid first under the terms of the contract with the Clients, and this takes time.
But ultimately if the work slows on site then the money doesn't come into the business and the company is still carrying a lot of overheads.
"The fund raise clearly isn't 'conditional' based on a specific margin - More so the board are to evidence moves towards a higher margin - Whether that can be realised is the question."
MAJWandCo,
I would suggest that whether that can be understood is the question.
How exactly do you measure or quantify that the company "could move towards a 6-7% profit margin."? I could win the lottery this week - though I'd stand a better chance if I bough a ticket. IMO, this fundraising stands little or no chance of taking off with the sp under 40p. And the sp stands little chance of rising until the BoD cancel the fund raise. Catch 22.
Costain have £4.2 billion worth of forward sales already. They are the big suppliers for HS2 alongside Kier and Balfour Beatty. Kier have also had to carry out fundraising recently. Construction work of this scale has major barriers to entry. It's complex and it needs high levels of liquidity. The UK has to provide another massive stimulus once this is over to avoid a depression. The government and the whole of the developed world are showing in their actions so far that they appreciate this in their response to the crisis in my view.
We will stick to the budget and we will be ploughing on with those infrastructure projects. 4.2 billion is just the start. Costain are acting responsibly. Directors are taking a hit on salaries. They didn't have to be told to do it like the banks. They can ride this out and then the recovery will be fast and high and it will continue to consolidate well imho. The only reason not to buy now is if you think there's further to fall. There might not be. Pretty soon we will start to understand the stats about cv19 more widely, we will adopt a robust testing strategy to protect vulnerable people, to isolate ourselves during periods of confirmed infection and otherwise to go back to work and go back to living.
A question..... if the Government, quite rightly is spending squillions on the C19 problems, will RIS2 and HS2 still go ahead on its current timeframe? SMP work for Costain is already drying up, the RDP East scheme is on a go slow (circa £1bn) and if the government wants to pour money into quick wins for UK PLC, then highway schemes are not the way to go. The Roads in a Year slogan that was adopted a few years ago was pie in the sky - the consultants that design the schemes struggle to get anything out in less than 2, factoring in all the environmental studies, surveys and optioneering.
IMO it will be a while until Costain sees 2% again, let alone 6-7%. The only way it can achieve those margins is to bin the construction of major projects in road, rail and water and focus purely on it's fledgling consultancy business, where returns can be much higher, but the revenue will be down to a quarter of what it is now.
Kenj - I must add that the 6-7% claims aren't my statements, they were those of analysts assessing the equity raise. (As below)
w w w . constructionnews.co.uk/contractors/costain/costain-must-deliver-up-to-7-margin-to-justify-100m-cash-call-11-03-2020/
To add, I'm very much not trying to avoid 'ramping' this share, i share your thoughts entirely regarding the awful handling of the equity raise. I am however focusing on facts, and mainly hard evidence (ie. Welsh interim report) to support my views.
The fund raise clearly isn't 'conditional' based on a specific margin - More so the board are to evidence moves towards a higher margin - Whether that can be realised is the question. Only an update on the equity raise will satisfy shareholders.
Just to add a note regarding the low margins across the construction industry - construction and infrastructure improvement are not equal . As per the report posted earlier today. The A465 project awarded by the Welsh Goverment was awarded based on a points system. Points were given based on price (30%) and Quality (70%). Costain were not the cheapest, they were deemed the best.
The UK Government have budgeted £27 billion to be spent on infrastructure before 2025. Will there be a shift towards a more sustainable approach in which contracts are not just awarded to the cheapest contractor a la the model above? Maybe not, but the UK Government would run out of contractors if the current approach were not adjusted?
Anyway - Do your own research folks, I enjoyed reading 100percent's critique. it would be good to get some more objective opinions on here vs the pump and dump rhetoric seen on many other share chats.
"In order for this equity raise to take place it was noted that the company would need to demonstrate to its investors that it could move towards a 6-7% profit margin"
If that is true MAJWandCo, then why did the RNS not state that the fund raising was CONDITIONAL on convincing major investors of the potential to increase the margin? And why did they say that the fund raising had been fully underwritten by HSBC?
As 100percent has said, this is a very big margin for a construction company. Most think that they are doing well to have a margin of over 4%. Contracts are usually awarded to the company submitting the lowest bid, who is deemed competent to undertake the work. Increasing your price makes it less likely that you will win further contracts.
This all smells of horse manure to me. The 6-7% margin would have been extremely difficult to "move towards" before Covid-19 hit us; now it must be virtually impossible. So why don't Costain simply announce that the fund raising is postponed / cancelled in lieu of market instability? The uncertainty over the RI is the main reason for the drastic sp collapse. Carrying on with this farce will simply delay any price recovery, and prolong the pain for shareholders.
The Equity Raise
Yes the lack of any information at all was/is extremely frustrating, it seems poorly executed by the board, but the facts remain:
In order for this equity raise to take place it was noted that the company would need to demonstrate to its investors that it could move towards a 6-7% profit margin. (See link below) https://www.constructionnews.co.uk/civils/final-cost-of-costains-a465-project-remains-uncertain-20-02-2020/
If the equity raise takes place, Equity Raise only provided on the basis of a targeted 6-7% profit margin. At £1billion/year revenue gives a target profit of £60m/£70m – For a company valued currently at £38m, that’s outlines how undervalued the current MC will be.
So for me, if the equity raise does take place, yes there will be dilution, but it is also huge resounding positive that Costain’s transition to its ‘Leading Edge Strategy’ (Page 18 https://www.costain.com/media/598758/cmd-presentation-for-website.pdf ) is viable.
Profits locked in the A465 - £80m?
The A465 was/is an extremely complex project which has resulted in a number of disputes with the Welsh Government. The only documented result thus far is a £20m loss to Costain which has obviously negatively affected the SP, however there is a potential HUGE upside coming Costain’s way if the below is to be believed:
“as of November 2019 the Welsh government has put aside an £80.5m to cover expected liabilities for adjudications that have been ruled in favour of the contractor”
https://www.constructionnews.co.uk/civils/final-cost-of-costains-a465-project-remains-uncertain-20-02-2020/
A positive adjudication of this nature would have a substantial impact on the share price.
Costain may not be primed to make the day traders their quick 40%, it may take a period of time to realise it’s true potential. There are multiple events that could change the landscape of the company overnight. Plus when the world reaches a stage where Covid-19 is a dim and distant memory, the government will be desperate to kick start the economy with heavy investment in the UK infrastructure, Costain will be ready to assist.