Costain Group PLC 

("Costain" or the "Group")

Interim results for the half year ended 30 June 2008

Costain, the engineering and construction group, announces a strong interim performance with profit before tax up 26% and a record forward order book.

*  Including share of joint ventures & associates

** Restated for the bonus element of the rights issue

• Strategy delivering profitable growth by focusing on customers with long-term investment programmes 
  

• High quality record order book

   

• • Increased by 25% to £2.0 billion (2007: £1.6 billion)
  • Further £1 billion of preferred bidder positions (2007: £500 million)

  • £495 million of 2009 revenue secured at 30 June 2008 (2007: £416 million)
    

• Approximately £900 million of new work secured during in the six month period ended 30 June 2008 including

• • Southern Water AMP4 contract extended to 2015 

  • A14 highway development in Cambridgeshire

  • Bell Common tunnel project on the M25

  • Farringdon Station, part of Thameslink Capacity Enhancement Project and future Crossrail interchange

  • Felixstowe container port expansion

     

• Strong net cash position of £133.2 million (2007: £42.1 million

   

• Banking and bonding facilities extended to September 2011 and increased by 42% to £285.0 million

   

• Interim dividend of 0.25p (2007: nil) 

   

Commenting on the results, the Chairman, David Allvey, said:

"Following the significant recovery in performance last year, we have delivered a strong result for the first half of 2008.

"We believe that, despite the current economic environment, our targeted blue-chip customers, in particular those in the public sector and regulated industries, will continue with their investment programmes.

"Therefore, Costain, with a strong cash balance and a record order book, is in a good position to continue to deliver growth in line with our expectations."

27 August 2008

CHAIRMAN'S AND CHIEF EXECUTIVE'S STATEMENT

Overview

Following the significant recovery in performance last year, this was a good start to the year with both revenue and profit up considerably on the same period last year. We also strengthened our cash position and achieved a record order book.

We have been successful in, and will continue to focus on, securing and retaining blue-chip clients in sectors with long-term investment programmes, a significant proportion of which is supported by public-sector and regulated industry spending commitments. This focused approach has ensured that the Group overall has continued to perform well.  

Results

Revenue, including the Group's share of associates and joint ventures, for the half year ended 30 June 2008 was up 9% at £467.5 million (2007: £430.0 million). Profits from operations were £7.5 million (2007: £6.6 million), an increase of 14%, whilst profit before tax was up 26% at £10.1 million (2007: £8.0 million). Earnings per share were 1.3 pence (2007: 1.5 pence, restated), reflecting the increase in the number of shares issued following the successful £60 million rights issue completed in October 2007.

As a result of the management actions taken last year, including raising £60 million, by way of a rights issue, and increasing the Group's banking and bonding facilities, we have been able to tender for and secure a greater number of larger contracts. This has resulted in a record order book, up 25% from the year end level. To facilitate continuing business growth, we have further enhanced our banking and bonding facilities in the first half of the year and our facilities now stand at £285 million and have been extended to 2011. 

Net cash at the period end stood at £133.2 million (2007: £42.1 million) an increase of £91.1 million, reflecting the £60 million net proceeds from the rights issue and strong cash management.

With an order book in excess of £2 billion, and a further £1 billion in preferred bidder positions, the Group has already secured almost £500 million of revenue for 2009.  

Dividend

In line with the Board's commitment to a progressive dividend policy following the return to the dividend list with the payment of 0.5 pence per share for the year ended 31 December 2007, the Board has declared a 2008 interim dividend of 0.25 pence per share. The dividend, which reflects both the Group's improved performance and the Board's confidence in the future, will be paid on 31 October 2008 to those shareholders on the register as at 26 September 2008. 

Pension

The Group's legacy defined benefit pension scheme deficit as at 30 June 2008 was £48.4 million net of deferred tax, an increase of £12.0 million from the position as at 31 December 2007. The increase reflects the downturn in the world's equity markets since the beginning of the year.  The assumptions and sensitivities used in the valuation of the pension scheme are set out in Note 7 to the interim financial statements.

In line with our previously announced policy, an additional cash payment of £1.6 million, matching the interim dividend payment, will be made to the scheme.

Operations 

Civil Engineering

The Group's Civil Engineering division, which accounts for over 80% of the Group's order book, includes the Infrastructure (Highways, Airports, Rail and Nuclear) and Environment (Water, Waste and Marine) activities.

Revenue during the period was £280.4 million (2007: £280.4 million), with a profit from operations of £11.8 million (2007: £10.1 million).  

Whilst revenues were at the same level as last year, operating profits were significantly improved reflecting an excellent performance in markets where Costain has strong positions and where we secured a higher number of project bonuses than last year for contracts completed ahead of schedule.  This also resulted in strong margin improvement where we continued to record an upper quartile industry performance.  

The division's order book was up 40% on the year end level following a number of excellent contract awards during the period, including a number with repeat order blue chip customers.  

In Environment, our Water operations, as a 40% member of the 4D consortium, scored a major success when it won a five-year extension to its AMP4 contract for Southern Water which gives the Group early visibility of a major earnings stream from 2010 through to 2015. In Waste, we are preferred bidder for a major scheme at Manchester and, post the period end, were awarded the £120 million contract at Riverside Belvedere. The Marine operation meanwhile was awarded the contract by Hutchison Ports UK for an enlarged container terminal at Felixstowe. .

In Infrastructure, our Highways activity got off to a strong start to the year with the awards of major contracts for the Bell Common tunnel project on the M25 and, in joint venture, the A14 in Cambridgeshire. In Rail, we secured an advance works contract at Farringdon Station as part of the Thameslink Capacity Enhancement Project in north London which, following Royal Assent for the Crossrail project, gains increased significance with Farringdon nominated as a Crossrail interchange.  

Having earlier this year been appointed to the BAA Complex Building Integrator Framework, our Airports operation secured initial advisory work at London Gatwick airport. Meanwhile, in Nuclear, we made progress in building a leading position in the decommissioning market, particularly at Sellafield which accounts for the majority of the UK's nuclear decommissioning programme.

Building

Revenue during the period was £146.9 million (2007: £108.5 million).  The net loss of £2.6 million (2007: loss of £0.4 million) is the result of provisions made for additional costs on one specific non-core residential project.

In line with our stated strategy of actively trading our PFI portfolio in order to invest in future opportunities, we disposed of our equity stake in the Kent Education Partnership concession, in the period, for a profit of £1.6 million and in line with the last Directors' valuation. 

Aside from the residential project referred to above, the division would otherwise have generated a small net profit and has a good positive cash position.  

Costain Oil, Gas & Process ("COGAP")

COGAP had a very good first half with a profit from operations for the first six months of £1.8 million (2007: £0.2 million) on revenue of £37.2 million (2007: £26.2 million). As a result of its refocused strategy and the remedial actions taken over the last two years, margins are approaching the targeted 5% level and have the potential to grow further on the back of an excellent order book.   

Excellent examples of the quality of work being secured by the division are the additional orders from E.ON and Gaz de France for the engineering and project management services for their major underground gas storage projects in Cheshire.

Good progress has been made in the year on the Pemex contract in Mexico and the plant is now in the final commissioning phase.

Land Development

With, as expected, no land transactions during the period, revenue for the period was £0.6 million (2007: £1.9 million) with a loss after tax of £0.6 million (2007: loss of £0.5 million). The loss in the period reflects running costs similar to those in the prior period.

As has been widely reported, the Spanish property market has become more difficult. Whilst we continue to pursue a major land transaction, due to the prevailing market conditions, we do not currently expect this to be completed by the end of the year. 

Meanwhile, construction has now commenced on the Group's 30-year marina concession adjacent to Gibraltar with initial income expected during the first half of 2010.  The Group's share of the equity investment in this significant project, which includes 798 berths, dry-dock facilities and commercial property development opportunities, is €7.5 million over the next two years. 

International

Following the decision in 2006 to close the International division, we are near to completing the remaining contracts, in particular Costa Azul where the facility is now operational and, whilst final minor works are being completed, commercial negotiations regarding the final account are ongoing.  

Management

In order to further align our organisation with our target customers, we have streamlined the operational management team to four Managing Directors, each with responsibility for a contracting division. In addition Alan Kay has been appointed as Chief Operating Officer with a specific remit to enhance our contract winning processes, project resourcing, technical excellence and operational delivery across the Group.

Risks and uncertainties

The Board continuously assesses and monitors the key risks of the business. Despite the current uncertainty in the global economy, the key risks that could affect the Group's medium term performance, and the factors which mitigate these risks, have not significantly changed from those set out on pages 22 to 24 of the Group's Annual Report for 2007, a copy of which is available from our website www.costain.com.

The Business Review and the notes to these interim financial statements include consideration of uncertainties affecting the Group in the remaining six months of the year.

Outlook

Following the significant recovery in performance last year, we have delivered a strong result for the first half of 2008.

We believe that, despite the current economic environment, our targeted blue-chip customers, in particular those in the public sector and regulated industries, will continue with their investment programmes.

Therefore, Costain, with a strong cash balance and a record order book, is in a good position to continue to deliver growth in line with our expectations.

DAVID ALLVEY

Chairman

ANDREW WYLLIE

Chief Executive

27 August 2008

Condensed consolidated income statement