a day ago
This engineer remains on track despite issues on the line
Questor is The Telegraph's stock-picking column, helping you decode the markets and offering insights on where to invest.
A slow start to Network Rail's CP7 spending and planning cycle, which runs from 2024 to 2029, continues to catch a range of companies off guard. These include equipment hire specialists Speedy Hire and Vp, engineering services company Renew, and signalling expert Tracsis.
We were starting to worry that portfolio pick Costain, another infrastructure specialist, could be dragged off course given its exposure to Network Rail and HS2. But a second reassuring trading statement in the space of a month hopefully means we can rest easy.
Visibility continues to improve, and as of December, the firm order book was £2.5bn, more than double analysts' forecasts for revenues this year, while Costain stood as preferred bidder on a further £2.9bn of work. Contract wins this year in nuclear energy with Urenco and Sizewell C, as well as Anglian Water as part of its AMP regulatory cycle, are further positive signs, adding weight to the belief that Costain's breadth of business could mitigate any issues with rail, of which the firm is thus far giving no indication.
Alex Vaughan, chief executive, and the board continue to assert that Costain can reach a run-rate profit margin of 4.5pc this year, and ultimately 5pc or more. Cash flow remains good and the balance sheet has a net cash pile, since it bears no debt, a pension surplus and only modest lease liabilities.
Such is management's confidence, Costain is launching a second £10m share buyback and continues to raise the prospect of a progressive dividend policy.
This is all well and good, but we have a paper gain of more than 140pc on the stock, with 3.2p per share in dividends on top, so it is tempting to lock in the gain, especially given the rail industry rumblings. Moreover, that 5pc margin target relies on skilled delivery of complex projects where margins are thin and the room for error limited, as illustrated by the heavy losses suffered on two problematic projects at the turn of the decade. Costain needs to demonstrate that it can improve its project management and derive a higher portion of its sales from more profitable consultancy work.
However, the net cash pile, including the pension surplus, represents almost 60pc of Costain's stock market capitalisation, so we have some downside protection.
More importantly, there is also still upside potential. A 5pc operating margin on £1.3bn of annual revenues could turn into earnings per share of around 20p, given the net cash balance sheet, a 25pc tax rate and the effects of the second £10m buyback programme on the share count. The still-lowly margin probably means Costain would merit a rating no higher than 10 times earnings, but 10 times 20 suggests a share price of 200p, if all goes to plan, some 40pc up from current levels.
Questor says: holdTicker: COSTShare price: 142.4p
We are already nicely in the black with challenger bank OSB and there could be more to come in the form of dividends and capital gains, if recent merger and acquisition chatter in the banking sector proves an accurate guide.
Granted, we will have to await firm numbers rather than rumour, but talk of a private equity approach for Metro Bank refuses to go away, while Spain's Banco de Sabadell has put TSB up for sale.
After a rapid advance, albeit from very depressed levels, shares in Metro Bank now trade at around one times tangible net asset value (Nav) per share. The reported price tag for TSB implies a similar sort of multiple, based on numbers disclosed in the Spanish parent's annual report for 2024.
OSB trades on 0.9 times historic tangible book value. It also makes a far higher return on tangible equity than either Metro Bank or TSB. Any new owner of Metro Bank may feel it can make rapid improvements in profits at the lender, given it has a last-reported cost-to-income ratio of 101pc, but they will have to go some to get that indicator down to OSB's 35pc. OSB also offers a higher net interest margin and higher regulatory capital ratios, while the impairment ratio for sour loans is broadly similar.
In addition, OSB comes with a forecast dividend yield of some 7pc, according to consensus analysts' forecasts. Granted, investors are demanding a lofty yield in compensation for the risks, since OSB is exposed to the buy-to-let and UK property markets at a time of economic uncertainty, but any hard-and-fast deals for TSB or Metro Bank could provide a steer as to OSB's potential value.
Questor says: buyTicker: OSBShare price: 498.6p
