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Costain share sell-off on lost road contract is "overdone" - Liberum

9th Jun 2023 10:22

(Alliance News) - Costain Group PLC shares tumbled 13% on Thursday after confirming media reports that it has been dropped from the A66 road project in northern England, but analysts at Liberum argued that the sell-off was "overdone".

Costain, a construction and engineering firm, said that due to a change in contracting strategy, it agreed with National Highways that its involvement in the A66 Northern Trans-Pennine scheme will come to an "organised and managed end".

National Highways is a UK government-owned company charged with operating, maintaining and improving motorways and major A roads in England. The A66 project is focused on upgrading the route between Penrith in Cumbria and Scotch Corner in North Yorkshire.

Costain was one of four contractors selected by the company for the GBP1.3 billion project, the others being Balfour Beatty PLC, Keltbray and Kier Group PLC.

On Thursday, Costain reassured investors that the A66 project was included only in its preferred bidder book, meaning the decision has no impact on its order book, which currently stands at around GBP2.8 billion, broadly unchanged from its full-year results in March.

For Liberum, this indicates that new wins for Costain match the "order burn" and, consequently, believe the market reaction on Thursday was "overdone".

"We expect the preferred bidder book has fallen slightly, but the impact will be small given management caution that is built into it," the analysts said, estimating that Costain's share of the contract was less than 25% and, once risk-adjusted, believe the impact on the preferred bidder book will be less than GBP200 million.

Further, Liberum maintained its stance that Costain is expected to deliver positive contract news before the release of its interim results on August 23. This gave the broker the confidence to leave its earnings and cash estimates unchanged.

For 2023, Liberum expects Costain to deliever adjusted pretax profit at GBP40.0 million on revenue of GBP1.31 billion. This compares to adjusted pretax profit of GBP34.2 million on revenue of GBP1.42 billion in 2022.

Liberum also retained its 'buy' rating on the shares and left its price target at 80 pence. Costain was trading at 47.60p, up 1.1% in London on Friday morning. The stock remains up 16% over the past 12 months.

Costain is a broking client of Liberum.

By Heather Rydings, Alliance News senior economics reporter

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