Costain tanks as it warns on full-year revenue

Costain shares tanked on Friday after the infrastructure company warned on revenue due to delays to a number of contracts.

The company said trading on current contracts in the first half has been in line with expectations overall. However, there have recently been a number of delays to the timing of contract start dates and new awards.

Projects affected include the M6 Smart Motorway, Preston distributor road and HS2 Southern Section main works. In addition, the M4 Corridor around Newport project was cancelled by the Welsh Government earlier this month.

As a result, the group expects 2019 revenue to be lower than previously anticipated, while underlying operating profit for the year is expected to come in between £38m and £42m.

Costain also said that its first-half results will include a £9.8m one-off charge in respect of a recent arbitration award in favour of Diamond Light Source, for the cost of remedial works deemed required to the roof at the National Synchrotron facility which was completed in August 2006.

Chief executive officer Alex Vaughan said: "Despite delays to the timing of certain contract start dates and new awards, our markets are strong, as evidenced by the breadth of our new contract awards in the first half.

"We have a strong balance sheet, profitable operations and a broad range of capabilities to support the growth of the business. Costain is well placed to secure the opportunities ahead of us."

At 0900 BST, the shares were down 36% at 197p.

House broker Liberum, which rates the stock at 'buy', cut its earnings before interest and tax estimate to £39.9m from £57.5m, to be in line with the company's guidance range. It also reduced its fully diluted earnings per share estimates by 33% and 29% for 2019 and 2020, respectively.

Liberum cut its price target on Costain to 350p from 545p.

Russ Mould, investment director at AJ Bell, said: "Smart infrastructure play Costain ended 2018 with a record order book implying 2019 could be a good year for earnings. So why then six months later is the company warning on profit? Well, being awarded lots of contracts is great, but these contracts can always be cancelled or delayed, and the profit derived from this future revenue depends on how efficiently the orders are executed.

"The company’s focus on providing construction and building services on large infrastructure projects to the likes of Network Rail and Highways England always left it vulnerable to delays when you consider the pressure on public finances in the UK, not to mention the high levels of political uncertainty.

"There was also a reminder of the perils of being exposed to a crumbling UK construction sector as the company took a near-£10m hit to cover remedial work on an historic contract, the subcontractor who should have been liable having gone bust.

"Today’s news marks a very tough start for Alex Vaughan as CEO, after the internal candidate took the helm in May. Vaughan is wasting little time in seeking to rebuild the market’s trust and plans to outline his medium-term strategy for the business next month."