Venture: UK Small Cap
Issue 4;
A UK industrial company that survived the pandemic. It is debt-free, in good health and dirt cheap.
Costain (COST)
COST is a construction company with an impressive history. They built the Channel Tunnel, the Thames Barrier and Hong Kong’s Chep Lap Kok Airport. It was a product of the Empire, but these days, the company has simplified its operations and is now solely UK.
The market cap is £151 million. It holds £132 million of cash, with £24 million of debt. The enterprise value is therefore a mere £43 million, which is tiny for a company with £1.4 billion of revenue. It is dirt cheap because it narrowly avoided bankruptcy during the pandemic and had a rights issue. Now it is debt-free, a modest dividend resumed on 21st September (yesterday), and I believe it is on a stable footing.
COST is not in any way exciting; it is just dirt cheap, with a healthy balance sheet. It is well placed to be on the right side of public infrastructure contracts, which insulates it from a weak consumer. The PE is 5x for next year, with cash flow expected to be £6 million in ’23 and £21 million in ’24. The brokers that cover it are bullish, with two forecasting 100p and 102p per share, nearly double the current price. That is a likely outcome over the medium term and probably conservative.
It is dirt cheap because COST has been a terrible investment over the years. Indeed, I looked back at the FTSE All Share Index since 1995. Only the banknote printer, De La Rue (DLAR), has performed worse, and they print money for a living. Each of COST’s downward lurches was born out of a debt binge followed by a rights issue. As I said, it’s now debt-free, the rights issue is behind us, and a rally is underway. This is a trade rather than a long-term investment, but there is considerable upside. It’s good for a small position.
Costain £30 to 30p
Risk
The balance sheet is strong, and given the compelling value on offer, the outlook is good. It is suitable for a modest sum, but the shares are not liquid as they only trade £200k per day. The additional risk comes from government contracts, the economic cycle, and the cost of staff, materials, and equipment. I deem it to be medium to high risk. If you include liquidity, it is high risk.
Please let me know your thoughts by emailing me at charlie.morris@bytetree.com or tweeting me @AtlasPulse.
Many thanks,
Charlie Morris
Editor, Venture
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