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
Venture is issued by ByteTree Asset Management Ltd, an appointed representative of Strata Global which is authorised and regulated by the Financial Conduct Authority. ByteTree Asset Management is a wholly owned subsidiary of CryptoComposite Ltd.
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