Costain Group plc
The UK construction industry has taken several blows in the
recent past – once Brexit uncertainties were beginning to lift, it has to deal
with a pandemic. Costain plc is a UK-focused technology-based construction
company serving the transportation and natural resources segments. It
has an illustrious history of UK construction and serves primarily large customers.
2019 was a sub-normal year for the company owing to contract
delays, cancellations, adverse arbitration judgments and other one-off factors.
Previous to that, it generated pre-tax profits of around GBP 40m. Operating
cash flows were adversely affected recently due to prompt payments to suppliers
required by UK regulations.
Other cash flow squeezes by customers requiring greater
financial strength from their contractors - partly as a result of recent failures
of other large contracting firms (e.g. Carillion) – has prompted the company to
propose a rights issue of GBP 100m, which is fully underwritten by bankers and investors
but due for shareholder approval.
The auditors have expressed concern on the going concern
assumption pending the shareholder approval. Although the company operated with
net cash of GBP 65m as at December 31st 2019, cash flow projections
leave it insufficient headroom on quarterly covenants with lenders.
This uncertainty has driven the share price to apparently
absurdly low levels of 35p – valuing the equity at a mere GBP 37m. This is less
than the net current asset value of GBP of 40.5m – a proxy for liquidation
value, and under 2x average past earnings. Insiders have been scooping up the
shares as recently as March 16th at 40p per share.
Covid-19 has curtailed London activities comprising 30% of
revenues. Until then, it has undrawn bank facilities of GBP 71m to lean on.
We can’t handicap the odds of the shareholder approval of
the rights issue; or the terms at which they’ll be set. Legacy shareholders are
almost certain to be diluted significantly near the current market price –but the
standby underwriting of the rights issue is a source of comfort.
At current market prices below liquidation value, entering
shareholders seem to have little to lose and much to gain with Costain.