20 August 2015

Costain Group PLC

('Costain' or 'the Group' or 'the Company')

Results for the half-year ended 30 June 2015

Costain, the engineering solutions provider, announces another strong performance with increases in revenue and underlying operating profit, a record order book and a 15% increase in the interim dividend for the first six months of 2015. 

1. Including share of joint ventures and associates

2. Before other items; amortisation of acquired intangible assets and employment related and other deferred consideration.

Highlights

·      Another strong trading performance

o  Revenue¹ increased to £621.1 million (2014: £529.1 million)

o  Underlying operating profit² up 17% to £13.1 million (2014: £11.2 million)

o  Net cash balance of £126.8 million (2014: £133.8 million)

·      Unique customer focused strategy generating record order book

o  Record forward order book up 16% to £3.7 billion (2014: £3.2 billion)

o  Over 90% of order book comprises repeat orders and over 90% lower risk target cost, cost reimbursable forms of contract

·      Leveraging opportunity to accelerate growth both organically and by acquisition

o  Post period-end acquisition of Rhead Group, further broadening range of capabilities

o  Banking and bonding facilities increased to £525 million and extended to 2020

·      Positive outlook for FY2015 and confidence in the future

o  Over £1.2 billion of revenue secured for FY 2015 by 30 June, (2014: over £950 million secured for FY 2014)

o  Increase of 15% in interim dividend to 3.75 pence per share (2014: 3.25 pence)

Andrew Wyllie CBE, Chief Executive, commented:

"We have delivered another strong performance in the first half of the year.  In addition to growth in revenue and profit, our order book now stands at a record £3.7 billion.

"Costain has an established reputation for delivering innovative integrated services that enables the Group to win large, long-term contracts addressing the UK's National needs in energy, water and transportation.

"Costain is accelerating its growth and following the 17% increase in underlying operating profit in the first half of the year is on course to deliver a result for the year at the upper-end of the Board's expectations.  Our confidence for the future is reflected in the 15% increase in dividend."

Enquiries:

There will be a presentation to analysts today at Instinctif Partners, 65 Gresham Street, EC2V 7NQ. To register your attendance please contact james.gray@instinctif.com

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

Costain is an engineering solutions provider, delivering integrated consulting, project delivery and operations and maintenance services, with a portfolio spanning 150 years of innovation and technical excellence. The Group's core business segments are in energy, water and transportation.

The Group's 'Engineering Tomorrow' 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.

Costain has worked on a number of high profile infrastructure projects in the UK, including the St Pancras Station redevelopment and the Channel Tunnel Rail Link. The Group's current major contracts include EVAP D at Sellafield, one of the largest decommissioning nuclear projects in the UK; the redevelopment of London Bridge Station for Network Rail; the design, installation and commissioning of railway systems for Crossrail; the Thames Water eight₂0 Alliance asset management programme; and the design and delivery of the water cooling systems for the proposed new nuclear power station at Hinkley for EDF.

CHIEF EXECUTIVE'S STATEMENT

Unique strategy delivering results

Through our unique and focused "Engineering Tomorrow" strategy we have successfully positioned the business to provide the range of innovative integrated services demanded by our major customers who are spending billions of pounds to meet critical national needs in energy, water and transportation.

Those customers are also consolidating their supply chains as they seek to derive business benefits by working in a more strategic and collaborative manner with a reduced number of preferred Tier One providers through larger longer-term contracts. To be successful in the future we must continue to grow the business, both organically and by targeted acquisition, to ensure that we have the scale and capability to satisfy the full range of their service needs for increasingly complex and large scale projects.

The year to date has seen good progress in line with our stated objective of accelerating the growth of the Group, both organically and by acquisition.

We are pleased to report another good overall trading performance in the first half of 2015. This reflects strong growth in the Infrastructure division, as major customers continued to invest in upgrading and renewing the UK's transportation networks, and is despite the impact of lower energy prices and further provisioning in the Natural Resources division. Consequently, revenue and underlying operating profit increased whilst the Group's unique customer-focussed strategy has generated a record order book of £3.7 billion. 

Post the period-end we have completed the acquisition of Rhead Group which further enhances the range of integrated services we provide to our customers. We also announced in the period the reorganisation of the non-core Alcaidesa joint venture in Spain.

Following the strong start to the year, the Group is on course to deliver a result for the full year at the upper end of the Board's expectations.  Reflecting the Board's confidence for the future, the interim dividend has been increased by 15%.

Robust trading performance

Revenue, including the Group's share of joint ventures and associates, for the half-year ended 30 June 2015 increased by 17% to £621.1 million (2014: £529.1 million), and Group underlying operating profit was also up 17% to £13.1 million (2014: £11.2 million). 

Net finance expense amounted to £1.5 million in the period (2014: £2.0 million), benefiting from a lower interest cost in the period on the net liabilities of the pension scheme.

The adjusted profit before tax increased by 25% to £11.4 million (2014: £9.1 million).

The Group's effective rate of tax was 15% owing to the timing benefit of deferred tax assets not previously recognised.

Adjusted basic earnings per share were 9.6 pence (2014: 9.2 pence).

Record order book

During the first half we were successful in securing a number of major new contract awards and extensions to existing contracts.  Consequently, the order book was up 16% to a record £3.7 billion at 30 June 2015 (30 June 2014: £3.2 billion). 

Our collaborative approach and reputation for excellent delivery continue to be key factors behind our success in securing an order book which includes over 90% repeat business. Further new contract awards in the first six months include:

·      Development of the M4 corridor around Newport for the Welsh Government

·      Underground link between the Crossrail and Bakerloo Line platforms at Paddington station

·      Two sections of the A14 improvement scheme for Highways England

As at 30 June 2015, the Group had secured revenue for 2015 of over £1.2 billion (2014: over £950 million secured for 2014).

The order book provides good long-term visibility with over £950 million of revenue secured for 2016 (2014: over £800 million secured for 2015), and £2.2 billion of revenue secured for 2017 and beyond.

In addition, the Group has a strong preferred bidder position, increased to over £500 million (2014: over £400 million).

Robust cash position

The Group's net cash position at 30 June 2015 was £126.8 million (2014: £133.8 million), with no significant debt.

The decrease in the net cash position reflects the continued growth in lower-risk target cost, cost reimbursable contracts, the payment of acquisition related deferred consideration in the period and the payment of the final dividend and associated pension contribution.  The average month-end net cash increased to £131.7 million for the period (2014: £82.0 million).

The Group has flexible financing in place to support its future growth and has recently increased its total banking and bonding facilities to £525 million with an extended maturity date of 30 June 2020.

Increased dividend

In line with its progressive dividend policy, targeting an ongoing dividend cover of around two times underlying earnings, the Board has declared an interim dividend of 3.75 pence per share (2014: 3.25 pence per share).

The dividend will be paid on 23 October 2015 to shareholders on the register as at the close of business on 18 September 2015.

Group Pension Scheme

The deficit on the Group's legacy Costain Pension Scheme ('CPS') at 30 June 2015 in accordance with IAS 19, net of deferred tax, was £29.6 million (June 2014: £40.7 million). The decrease is a result of company contributions and asset value gains offsetting an increase in liabilities due to changes in the market based assumptions used.

Deficit contributions continue in line with the plan agreed with the Trustee of the CPS with annual contributions being £7.0 million per annum (increasing annually with inflation) plus an additional contribution to match the total contribution to the total annual dividend amount paid by the company.  In accordance with this agreement, total contributions in the period were £5.9 million with further contributions of £3.7 million planned for the second half of the year.

Accelerating growth

The Group announced on 17 August 2015 that it had completed the acquisition of Rhead Group, a professional services consultancy with a focus on programme and commercial management.

Rhead Group, established in 1985 and operating with over 550 people, provides a range of solutions for the lifecycle of infrastructure, construction and asset management programmes, primarily in the UK, for a number of blue-chip customers including National Grid, Wales & West Utilities and BAE Systems.  Rhead Group's senior management team, including Nigel Curry, Rhead Group CEO, will remain with the business.

Costain's strategy is to focus on major customers spending billions of pounds addressing national needs in energy, water and transportation. Those customers are consolidating their supply chains and are seeking an increasingly integrated service offering from their Tier One service providers through larger, longer-term collaborative contracts. Rhead Group will further enhance Costain's programme management and advisory capability across all of the Group's operations as part of that integrated service offering.

Rhead Group has been acquired for a total cash consideration of £36.0 million on a debt free / cash free and normalised working capital basis and the consideration has been funded from Costain's existing cash and debt facilities.

In the year ended 31 July 2014, Rhead Group generated revenues of £63.5 million and EBITDA of £5.2 million (before exceptional administrative expenses of £0.7 million).

Rhead Group will be fully integrated into Costain's power sector in the current financial year, which following the acquisition, now reports into the Natural Resources division. The acquisition is expected to be earnings enhancing from 2016.

Separately, post the period-end, Costain took the opportunity to combine all of its nuclear activities across the Group into one unit which will report into the Infrastructure division. This action will enable a more concentrated focus on the opportunities in the nuclear sector, driven by investment in new energy solutions and the pressing need to deal with the UK's legacy nuclear infrastructure. 

The UK market is defined by significant and long-term planned expenditure programmes underpinned by committed regulated spend and essential capital investment. At the same time, and as we anticipated, the changing nature and increasing complexity of the requirements of the major customers in these markets continues to change fundamentally the way in which they procure services and work with their supplier partners.

These trends have created a rapidly changing and dynamic market environment in which further consolidation has taken place and is expected to continue. All potential opportunities to accelerate growth by acquisition are considered against a strict set of strategic and financial criteria

Focusing and prioritising resources

We have two core operating and reporting divisions within our business; Infrastructure and Natural Resources. 

We continue to focus and prioritise our resources on a group-wide basis and through our customer-aligned divisional structure, on identifying the most attractive new opportunities for the Company as a whole.

Infrastructure Division

The division, which in the first half incorporated the Group's activities in the highways, rail and power markets, has had a strong first half with an increase in revenue, operating profit and order book.

Revenue increased to £475.2 million (2014: £358.7 million) whilst operating profit rose to £23.6 million (2014: £16.9 million) as we delivered an excellent performance across the division including the award of gain-share on a number of contracts which enhanced margins in the period to the upper-end of  expectations.

The forward order book for the division has grown to £2.7 billion (2014: £2.2 billion) and the level of tendering activity remains high with a significant pipeline of opportunities.

In Highways, Costain secured new work and extended existing contracts with Highways England including winning two out of three lots of the major A14 programme and securing extensions on the Areas 12 and 14 maintenance contracts.  The Group, in joint venture, was also awarded the M4 corridor development contract around Newport for the Welsh Government.

In Rail, the year started well with the delivery, ahead of schedule, of all major blockade work for Network Rail at London Bridge and Crossrail Anglia.  Meanwhile, the Kent Multidiscipline Engineering Framework, West Coast Main Line Power Upgrade and Edinburgh to Glasgow Improvement Electrification contracts are all operating as planned.  The ABC Electrification joint venture, under Network Rail's National Electrification Programme, has commenced works to electrify the railway line between Swindon and Cardiff.  For Crossrail, good progress was made on the Paddington New Yard, Paddington and Bond Street stations.  The first of the new Crossrail tracks were laid at Connaught tunnel as part of the C610 System Wide contract.  For London Underground, good progress has been made on the complex Bond Street station upgrade and we have mobilised the Bakerloo Line Link contract.

In Power, work continued on the operations and maintenance contracts for Scottish and Southern Electric, Scottish Power and E.ON on the fossil fuel fleet of power stations.  For National Grid, Costain successfully completed the tunnelling on the 33km London Power tunnel contract.  

Natural Resources Division

The Natural Resources division in the first half incorporated the Group's activities in the oil & gas, nuclear process and water markets.

Revenue (including share of joint ventures and associations) in the division for the year was £145.0 million (2014: £169.4 million), with a loss from operations of £7.4 million (2014: £2.6 million loss).

The loss in the period reflects further costs in relation to the completion of the legacy Greater Manchester Waste Disposal Authority PFI contract awarded in 2007.  It was reported in the Group's full-year results, for the year ending 31 December 2014, that all 46 facilities on the contract were either fully completed or in the warranty period under the terms of the contract during which further work and plant modifications will be completed.  During the course of that further work a number of issues have been identified and are being addressed.  The Group has taken an additional provision in respect of the costs to reach Final Acceptance on the project, which is expected in the second half of 2016.

The division's performance was also impacted by the decline in energy prices which resulted in a number of projects in the North Sea being delayed.

The division has a forward order book of £1.0 billion (2014: £1.0 billion) and the level of estimating and tendering is high across all three of the division's sectors. 

In Water, the Group has continued to deliver successfully and to close out AMP-5 frameworks for United Utilities, Southern Water, Severn Trent Water, Welsh Water and Northumbrian Water. A number of contracts within AMP-5 will continue throughout 2015 into 2016, including delivery of the large waste water treatment plants at Liverpool and Woolston. The new AMP-6 five year programmes have been successfully mobilised for Thames Water, Severn Trent Water and Southern Water, and as a result we anticipate an increase in revenue in the second half of the year. In addition, work has commenced on the Shieldhall contract with Scottish Water.

Costain continues to broaden and develop its specialist capabilities in the Oil & Gas market across its upstream, midstream and downstream activities.  In upstream, which delivers asset development and asset improvement consulting services from its base in Aberdeen, Costain has continued to secure new work despite challenging market conditions and was recently appointed by ETI to deliver a new CCS storage appraisal project funded by DECC.

In Nuclear Process, the delivery of Evaporator-D construction at the Sellafield Nuclear Reprocessing Facility continues on plan.

Land Development

Our non-core Land Development activity in Spain, undertaken in joint venture with Santander Bank in the period, continued to be subject to challenging market conditions although the Spanish economy continued to show signs of improvement.

Revenue was £0.9 million (2014: £1.0 million) and the loss after tax was £0.5 million (2014: £0.5 million loss) reflecting the Group's share of the running and financing costs of the joint venture.  Our activities in the period focused on our leisure businesses of golf courses and a 600 berth marina, with a continued moratorium on development activity on the land-bank.

We announced on 1 July 2015 that, by mutual agreement with our joint venture partner, Santander, the assets held by the non-core joint venture would, subject to the fulfilment of certain conditions, be reorganised and split equally between the parties.  Following the reorganisation, which was completed on 21 July 2015, Santander took ownership of the two largest pieces of development land held by the joint venture and assumed a portion of the outstanding debt. Costain now owns the operating assets of the golf courses, the associated parcel of land and the marina concession, and has retained the balance of the outstanding debt.

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, are set out on pages 28-30 of the Group's Annual Report for 2014, a copy of which is available from our website www.costain.com

The Chief Executive's Statement and the notes to these interim financial statements include consideration of uncertainties affecting the Group in the remaining six months of the year.

Costain 150 Challenge

In 2015, Costain is celebrating its 150^th anniversary and, to help mark this special occasion, we are undertaking the Costain 150 Challenge, which will change many people's lives by raising £1 million for the Costain Charitable Foundation's four chosen charities: British Heart Foundation, Macmillan Cancer Support, Prince's Trust and Samaritans.  A number of fundraising events have been taking place across the business and to date over £750,000 has been raised, including a £ for £ matching pledged by the Group.

Positive outlook

We have delivered another strong performance in the first half of the year.  In addition to growth in revenue and profit, our order book now stands at a record £3.7 billion.

Costain has an established reputation for delivering innovative integrated services that enables the Group to win large, long-term contracts addressing the UK's National needs in energy, water and transportation.

Costain is accelerating its growth and following the 17% increase in underlying operating profit in the first half of the year is on course to deliver a result for the year at the upper-end of the Board's expectations.  Our confidence for the future is reflected in the 15% increase in dividend.

Andrew Wyllie CBE, Chief Executive

20 August 2015