Costain Group PLC ($COST)

Good morning, ladies and gentlemen. Welcome to the Costain Group PLC Full Year Results Investor Q&A session. [Operator Instructions] Before we begin, we would like to submit the following poll. I would now like to hand you over to the team from Costain Group PLC, Matt. Good morning, sir.

Good morning, and thank you very much. Thank you, everyone, for joining us for the Costain Full Year 2025 Results question-and-answer session hosted by Investor Meet. I am joined this morning by Alex Vaughan, Chief Executive Officer; and Helen Willis, Chief Financial Officer. As I said, this is a Q&A session. So we won't be going through the presentation. You can download that from our website. The webcast from the analyst presentation yesterday is also available for viewing on the website and the assumption is that you would have gone through those slides already. So what I will do is hand over to Alex to make some opening remarks. And then we do have some pre-submitted questions, which we will then turn to. But just to remind you, you can ask questions now on the platform. So I encourage you to please ask anything you have while you have the time, of Alex and Helen. Alex, thank you over to you.

Yes. Thanks very much, Matt, and good morning, everyone. I hope you're well. So look, just to sort of take you through the highlights of the results that we announced yesterday. So we're very pleased to report, as expected, we delivered another strong performance through 2025, which really reflects the quality of the contract portfolio that we have and how we and our teams expertly deliver it. We announced that we grew operating profits by 9% to GBP 47.1 million, which is ahead of consensus, and we delivered margins of 4.5%, making good progress towards our ambition of 5% industry-leading margins. As a result of the strong cash generation that comes off delivering that growth in profits and the actions that were taken on our legacy defined benefit pension scheme, we further strengthened our balance sheet and have announced increased returns to our shareholders. So we've increased dividends to our target of 3x cover. And we've yesterday launched a GBP 20 million share buyback. That's our -- now our third share buyback that we've gone on to. And I think everyone has seen that the strong performance of the company recently has seen us return to the FTSE250 this month, which is an important milestone for us and shows the development of the company. We remain set to benefit from committed investment in essential critical infrastructure. We've highlighted in our presentation the government's national infrastructure strategy that sets out a road map for GBP 725 billion worth of investment in infrastructure over the next 10 years. And on Monday, the government had updated its infrastructure pipeline that sets out that committed investment that's going to happen. And we're certainly seeing that this investment in essential infrastructure to meet those national needs is happening. And we've continued to secure further high-quality work, now having a record forward work position that was up 30% in the year to GBP 7 billion, which is over 6x our revenues and underpins the growth for the business that we've highlighted for 2026 and a step change in 2027 and beyond. And the presentation that we included with the results set out very clearly a lot more detail around that forward work position in terms of the changing customer mix that we've got, which increases the resilience of the business and supports the confidence in the returns that the revenues that we'll be delivering in 2026 and 2027. So these are exciting times for the business. We're in great shape and moving forward at pace. Thanks, Matt.

Great. Thank you very much, Alex. So let's turn to the pre-submitted questions. The first one is for you, Alex. So we've referenced the step change in performance that is expected for 2027 financial year. Since that will soon be upon us, can you give us a bit more disclosure around the drivers of that and why you feel as certain as you can be in achieving that? How much of that is down to new business that we -- that you know is coming in that reporting period? And how much of that is driven by margin improvement? And if it is driven by margin, how much of that is down to pricing or cost reductions?

Yes. Thanks. Great question. And one of the things I sort of highlighted yesterday is that most of the questions that we received were about the future, which was really great to be able to talk about because it's very positive. So if you get a chance, do have a look at the results presentation that we ran everyone through yesterday because in there is a lot more detail that will help answer this question. What we set out in the results presentation was how much work that we've got secured moving forward. So we've got 90% of our work for 2026 already secured, which gives us great confidence that we will be able to deliver 2026 in line with expectations. And in the presentation, we also highlighted that we had GBP 2.4 billion worth of forward work for the period 2026. So again, that should give everyone confidence that it is the increased volume of work that's coming through that's going to deliver that step change in 2027 that we've talked about, and I've now talked about it twice more today. So we never miss the opportunity to talk about it. And this comes from growing work in the business, certainly in water as we are now in AMP8, and we're moving from the design phase where we were in 2025 into delivery. And certainly, that will come through in the second half of 2026 and 2027 will receive a good volume of that water growth. And just to remind you, we've highlighted that investment in AMP8 is twice the levels it was in AMP7. So we're really seeing that water growth come through, and that is a big part of 2027. Also, we've got a number of new road contracts. So those will be in full delivery through 2027. And our work in aviation continues to grow, and we highlighted yesterday that we've also been now awarded 2 frameworks for Gatwick Airport. So good to see that coming through. And also the nuclear energy, where we've won a very large contract for Sellafield, and that work will be coming through, and we'll be delivering that in 2027. So the margin that we're saying is coming through is going to be pretty consistent. So we signaled yesterday that whilst we've delivered 4.5% margins for 2025. For 2026 and 2027, our margins will be sort of normalized around about 4%, which is industry-leading and well on our way to deliver the growth to 5% margins. So -- and if I sort of look at those margins, what's it driven by? It's driven by the quality of the contract portfolio that we have, really good contracts, long term in nature, and we get to develop the design and develop the pricing and develop the schedule with the customer before we make any commitments, which is great. So really good from a risk management point of view. And we've also got the consultancy services that we provide continuing to grow. And we've got an opportunity for greater productivity to still drive over and above that 4% margin. So in a really good place. So I hope that gives you confidence to understand why we talk about the confidence in 2026, step change in 2027 and the strength of most of that coming through new work being won, but really solid margins in the business.

Great. Thank you very much, Alex. I will pass over to Helen now, I think, for the next question, if I may. So the question is around margins and costs. So we achieved an operating margin of 4.5% for 2025. But just looking at recent events, there's likely to be cost increases in oil-related products and labor. Do you think this will have an impact on margins for us this year? We do have a related question on this coming through this morning from [ Gary B. ], which is around the ongoing inflation and supply chain pressures and how well our contracts might be protected from these type of cost increases. So we wrap that into this question, Helen. And then separately, but along the same lines, given recent events and the potential for interest rate rises, might that help our net cash position going forward as well?

Okay. Thanks, Matt. So on the sort of inflationary pressures that most businesses will be facing, I mean, this is a sort of 2-part answer to the question. Commercially, our contracts do protect us against inflation. And so it's not an immediate concern for us. But there's a corollary to it as well, which is that we need to, therefore, help our customers, because they will be feeling that inflationary pressure. So we work very hard with our customers to think about the solutions and outcomes that they're driving for, and we work very hard to help them to find more effective and sort of lower cost solutions to delivering those. So initially, not a risk for us, but something we're very alive to, and we need to work very hard with our customers to help them to alleviate those spend pressures. And that goes across materials and people. So the 4.5% to the 4%, as Alex has said, it really is -- the 4% is our normalized view for our portfolio, 4.5% in 2025 is because we had a higher number than usual of contract completions that did complete very well and were cash backed. So 4% is what we consider to be normal and prudent, and then we will layer on those additional factors that Alex just mentioned. So that's margin. Yes, interest rates for us, we have cash. We don't have any borrowings. And so if the interest rates stay higher than we thought, then we will absolutely benefit from that higher interest rate on our sort of fairly sizable cash balances and you'll see. We talk about our cash as costing cash and then cash held in joint ventures. So both of those balances are earning interest. So yes, we're protecting ourselves against, I guess, and that is a silver lining for what everyone is going through at the moment, yes.

Okay. Thank you very much, Helen. Next question from [ Chris G. ]. I'll put to Alex. So it is, again, related really to the current global economic uncertainty. And given that, do you have any, I guess, initial views on the strength of our contracts that are underway and the risk of those getting postponed or canceled if the government finds funding to come under pressure. For example, HS2, we've seen some pushouts before. Is there risk around some of those contracts?

Yes. Look, [ Chris ], thanks very much for that question. Look, clearly, uncertain times for everyone in the Middle East and not where any of us would like us to be. But just to give you some confidence, I had a meeting with government with treasury on Monday. And they've reconfirmed that this investment in infrastructure from their point of view is, to use their words, both essential and crucial. Very clearly, the government is focused on driving prosperity, growth in the economy and to improve the productivity of the U.K. as well as resilience. So we can see now around energy, the need for us to have a resilient lower-cost energy system. So very clear message from government was that, that investment has got to happen, and it's going to happen, and we've been -- we've now got a lot of that in our forward work position. But also a lot of the investment comes through committed regulations. So those companies have now signed up to regulatory commitments that they have to meet. Those aren't discretionary. They've got to make that investment. They've got to achieve the improvements that they set out. And so that investment will be coming through. And we've purposely positioned this business to be focused where the nondiscretionary investment is going to be made. And it's been a long time that we've had a number of factors globally affecting the U.K. economy, and that's one of the reasons why our strategy has focused on that nondiscretionary investment. So we're very confident that, that investment will come through. We can see it because of the long-term nature of our contracts, we can see it coming through. We know it's essential. We know it's crucial. And certainly, all the conversations that we're having is that there will be no change in that investment coming through, and we're very confident in certainly 2026, '27 and beyond.

Thank you, Alex. I actually had a follow-up question from [ Chris ]. He is asking, so if you were to look into your crystal ball, is there a share price you have in mind that you think would truly reflect the value of Costain and its potential going forward?

If I -- well, [ Chris ], great question. If I had a crystal ball that could foresee things, I'm not sure I would be the Chief Exec of Costain. I'd probably be on a yacht somewhere. But look, I think, everyone has turned around and said, we're very pleased with the reaction to the share price yesterday. I think that just demonstrates people's confidence in the growth prospects for this business and the direction of travel and the fact that we're doing what we said we were going to do, which is -- which we're very pleased with. And all the feedback that we've had is that investors believe that there's still much more room for us to grow. And if I look at yesterday's results, we didn't upgrade our numbers. We did what we said we're going to do. So it's just confidence in the business, and there's still more to go. So the share price should be higher than it is today. And we've got big ambitions for this business that would unlock further value for the business. So I'm certainly not going to put a forecast out there. I'm certainly not going to make a comment other than we believe there's great value still to come in Costain. Helen, anything to add on that?

No. And I completely agree with you, Alex. We believe us to be currently undervalued. We're signaling that we're going to grow. And all of that should work its way into increasing the share price. So yes, we're very excited about that.

Great. Thank you. Just another question, just in. I'll come to Helen for this one, which is a broad question really about how we manage contract risk across sort of long-term framework projects. So just a broad, how we go about it.

Fantastic question. It's so important for us, managing risk for ourselves and for our customers is really at the heart of our company performance. So we've worked really hard over the last few years on exactly that topic. So it starts with winning the right business, and we've talked about the forward work position of GBP 7 billion having the right risk profile. So we've invested in expertise to help us think, first of all, develop the right business, then to scrutinize the opportunities that we are working on to understand the risk profile, to mitigate those risks in terms of how we price our contracts, how we share risk between ourselves and our customers and therefore, get into contracts that protect us -- incentivize us clearly because customers want us to work with them, but protect us in a way that wasn't always the case in the past. So that's winning the right business. There's a lot of work that goes into that, a lot of different sets of expertise, financial, legal, commercial, risk specialists along with what you would expect in terms of how deliverable is the contract. So lots of different sets of expertise coming into that assessment, and we believe that the forward work we have now represents exactly that, the risk profile that we can manage. And then you go into delivery, and it's constant scrutiny by really good people throughout the business driving delivery, driving it really hard. Focusing on safety, a safe site is one that's going to be successful overall. That's what I've learned in my 5 and a bit years here, running a site really well, you're running a project really well. And that takes very good people with good processes and plenty of review and scrutiny and always challenging ourselves to be better. So it's something we're constantly striving to do better. We think there's more we can do to be more efficient. We're always striving to be the safest we possibly can be and therefore -- and to be as predictable as possible. And you can see that in the quality of our results over the last few years in that margin improvement. So it's the thing that we talk about every single day, and we're always striving to be better.

Great. Thank you very much, Helen. It looks like there's one final question, which I will take, I think. It's from initials R.W., who starts by congratulating yourselves on the share price reaching a new sort of post 2019 high. But then he expresses some irritation, which I share, by the way, about the -- our RNS feed getting clogged up with UBS holding notices where they're shifting their position around. So -- and you've asked whether there's any way we can do away with those by checking with the FCA as to whether they're necessary. So I absolutely share that frustration and irritation. We have done lots of checks on this. We have unfortunately been told that this is a result of UBS essentially moving their holdings between different accounts within their bank. Some of those accounts are disclosable and some aren't. So that is our understanding from what is taking place there. We will continue to try and find ways to see if we can work with UBS to stop that, but it is an unfortunate just outcome of how UBS are holding that position at the moment. One more just come in as I answered that question from [ Daniel ]. I will put this to Alex. So back on margins, is it theoretically possible for the business to ever get to a 10% operating margin? Or should -- is that something which would be inconceivable for this type of business to get to?

Is that from [ Daniel ]? I love [ Daniel's ] challenge. So look, do we think we're worth 10% margin? Yes. But realistically, that would be very challenging in this marketplace. It's never been seen before anywhere. I think doing what the business does today, I think, the margins that we're earning are at the top end of the marketplace. Certainly, 4.5% that we delivered for last year is industry-leading. And we've set a very clear ambition that we want to get to 5% margins, which we think would be really top of the market and would represent the good value for the business. So I honestly can't see a way to get to 10% margins doing what we're doing. But all I can say is that this business in this market is operating at the highest margin levels that are around, which is a measure of the quality of the contracts that we've got and the caliber and expertise of the teams that work in Costain every day. So we're very proud of it, but not satisfied.

Thank you very much, Alex. So that does seem to be all of the questions that we have come through this morning. Thank you very much to everyone. Some great questions there. Given there are no more, I will just hand back to Alex, I think, for some closing remarks and then hand back to our presenter.

Yes. So look, thank you very much for joining this call this morning. Thank you for your questions. And thank you mostly for believing in Costain and being an investor in Costain. We really appreciate you taking the opportunity to engage with us. These are exciting times for investment in infrastructure, in creating prosperity for the U.K., resilience in the U.K. and to decarbonize the U.K. We're proud of the role we're playing, and we're really proud of the progress we're making in growing shareholder returns for our business and making a difference. So thank you very much, and take care. Look after yourselves.

Perfect, guys. That's great. If I may just jump back in there. Thank you very much indeed for updating investors this morning. Could I please ask investors not to close this session as you will now be automatically redirected for the opportunity to provide your feedback. On behalf of the management team of Costain Group PLC, we would like to thank you for attending today's presentation. That now concludes today's session. So good morning to you all.