Analyst note Costain

Costain Group Annual Report states they “received prestigious recognition for our approach when we obtained the London Stock Exchange’s Green Economy mark.

“This identifies companies that generate at least half of their revenue from products and services that contribute to the green economy. The mark is only held by around 6% of companies on the LSE.”

Note that a £10million share buyback program concluded in November 2024. Over the previous financial year, cash from operations FY24 was £42.7m (FY23: £69.6m), “resulting from increased operating profits offset by year-end timings of certain cash receipts at the end of FY23 and FY24, together with some end of contract outflows in FY24.”

The adjusted free cash flow in FY24 of £27.1m (FY23: £70.2m) was lower than the same period last year largely “due to the timing of year-end working capital and higher tax and expenditure payments” with internal adjustments as funding was diverted into updating infrastructure, requirements for new business systems; and increased cash flows on adjusting items, with turn on non-current assets offset against “reduced pension fund deficit contributions.”

Liquidity considerations aside, the adjusted operating profit margin was 3.4% compared to 3.0% FY23 yoy, with 4.4% growth in H2 as Costain states it saw greater operating efficiency and productivity in the Natural Resources division, with higher marginal profits.

Total revenue from transport fell from 943.1m in 2023 to 845.8m in 2024, at a higher operating margin of 3.5% from 3.0%. Road and rail takings fell, although integrated transport projects experienced expansion of 92.7% The net business forecast is for an optimistic 5% growth rate for FY 2025 after an initial target of 4.5% over the course of 2025.

As regards sustainability targets, their Scope 1 emissions reported 4,772 down from 4,875 (-2.1%) and Scope 2 (-3..16%) was 888 down from 1,299. Scope 3 emissions saw just a 1% increase from 281,765 FY23 to 278,248 FY24. In terms of accountability, Costain reports that 100% of relevant contracts were working in accordance with PAS 2080.

Its ambitious target is for a 6% yoy reduction in Scope 1 and Scope 2 emissions, the same percentage for the absolute emissions value. In some ways accepting the limitations of its capacity to cap emissions is preferable to mis-reporting it, which happened recently with UK energy company Drax, whose share price fell over 10% in a day immediately after regulators signalled an investigation into whether the provenance of wood chips for biomass pellets was actually sustainable, and the emissions reporting for the diesel ships transporting wood chips from the US did not comprise a Scope 2 or 3 emissions estimate.

Costain is targeting a dividend payout of 3x adjusted earnings. Payments were resumed in FY23 with a full-year dividend of 1.2p per share for the year, in line with the pension payments required for the year under the “dividend parity arrangement.” The board has approved a final dividend of 2.0p per share.

The company is transparent about its desire to capitalise on the problems caused by climate change, and highlights the risk-based opportunities for its diverse business lines –

“There is a high potential in the water sector – the capacity of sewage needs to be increased to deal with additional strains placed on it by rainfall intensity coupled with increased demand,” and considering the enhanced “maintenance and modification to improve the drainage capacity or resilience of its assets.”

It highlights the initiative of a carbon tracker which will provide unified measures of resource usage across different project lines, and demonstrate areas of improvement relative to industry benchmarking.