Costain Regulatory News (COST)

Costain Group PLC

("Costain" or "the Group" or "the Company")

Interim results for the half-year ended 30 June 2013

Costain, one of the UK's leading engineering solutions providers, delivering integrated consulting, project delivery and operations and maintenance, announces a 3% increase in underlying operating profit3, a 20% increase in the order book to £2.9bn and a 7% increase in the interim dividend for the first six months of 2013

The Board is confident of delivering results for the full year in line with its expectations.

1. Re-stated for revised IAS19 Employee benefit accounting standard

2. Including share of joint ventures and associates

3. Underlying operating profit (before amortisation of acquired intangible assets and employment related acquisition consideration) in 2013 excludes £3.7m one-off costs associated with the offer for May Gurney Integrated Services plc and in 2012 excludes the £2.8m one-off costs resulting from pension scheme liability actions.

4. Results stated before amortisation of acquired intangible assets and employment related acquisition consideration and in 2013 before £3.7m one-off costs associated with the offer for May Gurney Integrated Services plc. 2012 includes £10.5m profit arising from transfer of PFI assets into the Group's pension scheme and £2.8m one-off costs resulting from pension scheme liability actions.

· Underlying operating profit3increased by 3% to £10.7m (June 2012: £10.4m)

· Adjusted profit before tax4of £8.4m (June 2012: £16.3m, which included a £10.5m profit arising from the transfer of PFI assets to the Pension Scheme and £2.7m one-off costs resulting from Pension Scheme liability actions)

· In excess of £900 million of new contracts and extensions secured in the first half

· Forward order book up 20% to £2.9 billion (June 2012: £2.4 billion): over 90% of order book comprises repeat orders

· Over £850 million of revenue secured for FY 2013 by 30 June including 30% of support services activities

· Net cash position of £64.3m (June 2012: £131.5m), reflecting the anticipated transition to lower risk cost reimbursable contracts, reduced levels of advance payments and increasing support services revenues

· Interim dividend increased for sixth successive year, by 7% to 3.75 pence (2012: 3.5 pence)

Post period end, acquisition of EPC Offshore Limited, a specialist oil & gas project management services company, for an initial consideration of £9.6 million, and launch of Costain Upstream to provide services across the life-cycle of upstream oil and gas assets

David Allvey, Chairman, commented:

"This was an encouraging start to the year with a 20% increase in our order book to £2.9 billion and an increase in underlying operating profit, against a backdrop of market conditions which continue to be challenging.

"Costain is building its order book by generating, through its commitment to 'Engineering Tomorrow', innovative integrated service solutions for major customers who are continuing to invest to address essential national needs.

"Costain remains on course to deliver a result for the year in line with the Board's expectations and we are pleased to increase the interim dividend for the sixth successive year."

 22 August 2013

A film discussing the highlights of the results is available at www.costain.com

Notes to Editors (for further information please visit the company website: www.costain.com)

Costain is a leading UK engineering solutions provider, delivering integrated consulting, project delivery and operations and maintenance services, with a portfolio spanning almost 150 years of innovation and technical excellence. The Group's core business segments are in Infrastructure (Highways, Rail, Power and Airports) and Natural Resources (Water, Hydrocarbons and Chemicals, Nuclear Process and Waste).

The Group's strategy involves focusing on blue chip customers in chosen sectors whose major spending plans are underpinned by strategic national needs, regulatory commitments or essential maintenance requirements. 'Engineering Tomorrow' is the Costain commitment to generating and delivering innovative, value-driven solutions to meet major national needs.

Costain has worked on a number of high profile infrastructure projects in the UK, including the St Pancras railway station and the Channel Tunnel Rail Link. The Group's current major projects include the municipal waste treatment infrastructure for the Greater Manchester Waste Disposal Authority, EVAP D at Sellafield, one of the largest decommissioning nuclear projects in the UK, and the Network Rail contract for the redevelopment of London Bridge Station.

Chairman's and Chief Executive's statement

We are pleased to report an encouraging start to the year, with a 20% increase in our forward order book to the record level of £2.9 billion. The fact that the order book comprises over 90% repeat orders from our blue chip customers, who are continuing to invest in meeting vital national infrastructure needs, is testimony to the increasing recognition and appeal of Costain, as an innovative solutions provider.

Only a select group of companies in the UK meet the stringent criteria now demanded by blue chip customers, who are increasingly working only with suppliers who can deliver a full range of services across the life cycle of a project, ahead of time and on budget, as well as sharing their corporate and social values. Our key differentiator, which is directly benefitting the order book, is our focus on 'Engineering Tomorrow': a commitment to generating and delivering innovative, value-driven solutions to meet major national needs.

We are providing customers with world class engineering solutions in design, delivery and maintenance by constantly developing new skills, products and services and introducing innovative processes and new technologies. Increasingly, we are also being selected for our ability to provide full programme management as well as project delivery, placing us at an advantage over Tier One programme managers in tendering for and winning long term projects which cover the full life cycle of an asset.

In the first half of the year, Costain was awarded new contracts and extensions worth more than £900 million to the Group. The range of work won reflects the rapid transition in our market positioning and increased breadth of our service offering, and include:

· The £450 million AMP6 programme for Thames Water, our share of a landmark £1.2 billion contract secured in joint venture;

· A £300 million contract, in joint venture, to design, fit-out and commission the railway systems for Crossrail;

· The FEED design for Centrica's gas terminal at Barrow, following successful completion of the design and construction of the Easington terminal for the York field;

· A highways framework contract for Transport for Londonincluding the Hammersmith Flyover strengthening project; and

· The electrification upgrade of the West Coast Mainline for Network Rail which is a new area of operation for Costain.

Our collaborative approach and reputation for excellent delivery are primary factors behind our ability to secure such a high level of repeat order business. Additionally, the increasingly strategic nature of our long-term customer relationships has ensured that over 90% of the order book is now some form of target cost, cost reimbursable contract. Whilst this has contributed to the reduction in our net cash balance, it has also significantly improved the risk profile of the Group and afforded us increased visibility over long term margins for the projects in our future pipeline.

We will continue to grow the business both organically and by targeted acquisition. Since the period end, Costain has announced the acquisition of EPC Offshore limited, a specialist oil & gas project management services company, and the launch of Costain Upstream, which will deliver a broad range of engineering services for assets in the upstream oil and gas sector.

Results

Revenue, including the Group's share of joint ventures and associates, for the half-year ended 30 June 2013 was £462.9 million (2012: £477.9 million). Our continuing focus on higher margin activities drove an increase of 3% in Group underlying operating profit of £10.7 million (2012: £10.4 million).

The adjusted profit before tax was £8.4 million which compares with profit before tax in H1 2012 of £16.3million which included a £10.5 million profit arising from the transfer of PFI assets to the Costain Pension Scheme and £2.7 million one-off costs resulting from Pension Scheme liability actions.

Net finance expense amounted to £1.6 million in the period (2012: £1.3 million), the increase mainly due to the pension scheme related net finance element.

Adjusted basic earnings per share were 10.6 pence (2012: 22.2 pence).

Cash Flow

As a result of the Group's rapid transformation, and strategic focus on major blue chip customers who in over 90% of cases now utilise a target cost based, cost reimbursable form of contract, our net cash position includes a lower level of advanced payments than typically paid on traditional lump sum contracts. As anticipated this transition, together with the cash flow implication of a delayed contract completion, largely accounted for the reduction in the net cash position to £64.3 million as at 30 June 2013 (2012: £131.5 million). The average month-end cash balance was £65.6 million during the first six months of the year (June 2012: £120.4 million).

These lower risk target cost contracts, together with the increasing levels of support service related activities which we are carrying out and the general industry trend towards a greater degree of project specific cash balances and supplier prompt payment mechanisms, will continue to change the structure of the cash position in the sector, reflected in increased working capital requirements and therefore lower net cash balances in the future.

The Group has flexible financing in place to support its future growth and has recently increased its total banking and bonding facilities to £495 million and extended the maturity date to 30 June 2017.

Order Book

We were successful in securing a number of major new contract awards and extensions to existing contracts. Consequently, the order book, as at 30 June 2013, increased by 20% to the record level of £2.9 billion (2012: £2.4 billion). It comprises over 90% repeat orders and includes over £850 million revenue secured for 2013, of which 30% is support services related activities.

The order book also provides increasingly good long-term visibility with over £700 million of revenue secured for 2014, an increase of over £100 million on the equivalent figure last year (2012: circa £600 million secured for 2013) and in excess of £1.8 billion secured for 2015 and beyond.

In addition, the Group has also increased its preferred bidder position to over £500 million (2012: £400 million), and the level of tendering activity remains high.

Acquisition of EPC Offshore Limited ("EPC Offshore") and launch of Costain Upstream

After the period end, Costain announced the acquisition of EPC Offshore, a specialist oil & gas project management services company, for an initial consideration of £9.6 million (plus £1.0 million for excess cash). Costain also announced the launch of Costain Upstream, which will provide services across the life-cycle of upstream offshore oil and gas assets.

Established in 2009, and with a workforce today of 75 professional staff led by founder and CEO Keith Wallace, EPC Offshore is a field development and project management specialist providing client-side services to North Sea oil and gas companies. The company is differentiated by its programme management expertise and the highly effective application of proprietary in-house systems and processes.

The acquisition is expected to be earnings enhancing to Costain in the first full year of acquisition.

Costain Upstream will combine the capabilities of ClerkMaxwell, the oil and gas engineering and support services provider, which has more than doubled in size since its acquisition in 2011, and EPC Offshore to increase the scale of the Group's services in the growing, high-value North Sea upstream oil and gas market.

Lapsed all-share merger with May Gurney Integrated Services plc ('May Gurney')

The Boards of Costain and May Gurney announced in March that they had reached agreement on the terms of a recommended all-share merger of Costain and May Gurney (the 'Proposed Merger').

In April, Costain announced that, having undertaken several months of detailed due diligence, it did not believe that it would be in the best interests of Costain shareholders for Costain to amend the terms of the Proposed Merger and that it would not be making a revised offer for May Gurney. Accordingly, the Proposed Merger lapsed in accordance with its terms.

As previously outlined, the Group incurred transaction costs of £3.7m (pre-tax) associated with the May Gurney proposal and these have been expensed in the first-half results and treated as a one-off non trading item.

Dividend

The Board has declared an increased interim dividend of 3.75 pence per share (2012: 3.50 pence per share) which is the sixth successive year of increase. The dividend will be paid on 25 October 2013 to those shareholders on the register as at the close of business on 20 September 2013.

Group Pension Scheme

Over a number of years the Board has taken various decisive actions to manage the Group's legacy pension scheme.

The deficit at 30 June 2013 was £31.6 million net of deferred tax (June 2012: £29.6 million) (Dec 2012: £40.0 million), the reduction since the year-end results from planned contributions and improved market returns. In accordance with the requirement for a tri-ennial review, a full actuarial valuation of the scheme, as at 31 March 2013, is being carried out.

Board

Mike Alexander, a non-executive Director since July 2007, will retire from the Board on 31 March 2014. We would like to thank Mike, albeit ahead of his retirement, for his contribution and advice over the years and wish him well for the future.

Operational Review

One of the strengths of Costain is the ability to focus group-wide resources to meet specific customer requirements, addressing opportunities to optimise returns for the Company as a whole, irrespective of divisional structure.

To help facilitate this speed and agility of response, in November 2012, the Group announced the formation of a new operational structure of two core divisions, with effect from 1 January 2013. The new Natural Resources operating division, encompassing the Group's activities in the Water, Hydrocarbons and Chemicals, Nuclear Process and Waste sectors, now operates alongside the Infrastructure division, which now includes the Group's activities in the Rail, Highways, Power and Airport sectors.

Infrastructure Division

Revenue (including share of joint ventures and associates) in the Infrastructure division during the period was £262.8 million (2012: £246.2 million), with adjusted profit from operations of £14.4 million (2012: £9.6 million). The improved profit performance reflects increased revenue, strong operating returns and additional gains on successfully completed projects.

The order book for the Infrastructure division has grown to £1.7 billion (2012: £1.5 billion), reflecting our successful focus on the most attractive opportunities in our chosen market sectors. We have a strong pipeline of work and the level of tendering activity remains high.

Reflecting our growing presence in the Rail market, during the period we secured, in joint venture, further Crossrail contracts including the installation and commissioning of the railway systems, and the provision of the traction power supply. Good progress was made on the Network Rail redevelopment contracts at London Bridge and Reading stations, and Costain, in joint venture, was awarded its first electrification project on the West Coast main line. Costain is also involved in providing consultancy services for the design of High Speed 2.

Costain continues to be a leading supplier to the Highways Agency and significant progress is being made across a large portfolio of professional services, construction and maintenance contracts. The Area 7 MAC contract was extended and work commenced on further sections of the M1 managed motorway scheme. Transport for London awarded the Hammersmith Flyover strengthening project following the appointment to their highways framework contract.

In Power, Costain was awarded its first contract by UK Power Networks on the 132kV and 33kV overhead line framework. Costain continued to provide operating services and cooling tower re-pack maintenance at Fiddlers Ferry, Ferrybridge and Ratcliffe power stations for SSE and E.ON.

Natural Resources Division

In the Natural Resources division, revenue (including share of joint ventures and associates) was £199.2 million (2012: £230.9 million). A small adjusted loss from operations of £0.1 million (2012: profit of £5.0 million excluding the profit on PFI transfers) reflects lower revenues, additional costs to complete a project and restructuring and business development costs including the deployment of new skills and capabilities under a strengthened leadership team.

The restructured division has already seen some early success with its order book increased to £1.2 billion (2012: £0.9 billion). The level of tendering activity is also increasing, reflecting the timing and attractiveness of sector opportunities.

Costain is engaged in a number of on-going AMP5 framework contracts with Northumbrian Water, Severn Trent, Southern Water, United Utilities and Welsh Water. The Group has recently announced that it has secured in joint venture its first AMP6 contract, a landmark £1.2 billion integrated service award by Thames Water. The Group is well positioned to secure new contracts or extensions during a Regulatory Review cycle which is expected to require a more integrated service delivery.

In Hydrocarbons and Chemicals, the Group has successfully completed to time and budget the Easington gas terminal for Centrica's York field. The formation of Costain Upstream, which will initially include the ClerkMaxwell and EPC Offshore businesses, is expected to contribute significantly to the division's profitability. Based in Aberdeen, Costain Upstream will deliver engineering, capital projects and asset support services across four principal service lines; Field Development, Subsea Facilities, Topside Facilities, and Floating Systems, and comprises a resource pool of over 350 people including operating and support units in Maidenhead, Teesside, Manchester and Abu Dhabi.

The final, and largest, of the prefabricated modules for the EVAP D nuclear decommissioning project at Sellafield is expected to be shipped to site in September in line with the programme. Work is continuing on various Magnox sites following the award of the 10-year framework contract last year.

In the Waste sector, the Group is completing the PFI contract for the Greater Manchester Waste Disposal Authority. Further progress has been made in the period on the scheme, which utilises a range of sophisticated waste management technologies. One of the two remaining facilities is in an extended commissioning phase with continuing commercial discussions regarding completion.

Land Development

In the non-core Land Development activity in Spain, revenue for the period was £0.9 million (2012: £0.8 million) with a loss of £0.7 million (2012: £1.0 million). The loss reflects the running costs of the operations and with on-going difficult economic conditions in Spain we continue our moratorium on development activity on our land-bank. Our current activities are focused on our leisure businesses of golf courses and a 600 berth yacht marina which has experienced increased levels of activity in the period.

Risks and uncertainties

The Board continually assesses and monitors the key risks of the business. The key risks that could affect the Group's medium term performance, and the factors which mitigate these risks, have not significantly changed from those on pages 40 to 41 of the Group's Annual Report for 2012, a copy of which is available from our website www.costain.com.

The Business Review and the notes to these interim financial statements include consideration of uncertainties affecting the Group in the remaining six months of the year.

Summary & Outlook

This was an encouraging start to the year with a 20% increase in our order book to £2.9 billion and an increase in underlying operating profit.

Costain is building its order book by generating, through its commitment to 'Engineering Tomorrow', innovative integrated service solutions for major customers who are continuing to invest to address essential national needs.

Costain remains on course to deliver a result for the year in line with the Board's expectations and we are pleased to increase the interim dividend for the sixth successive year.

David Allvey,

Chairman

Andrew Wyllie

Chief Executive

22 August 2013