In Monday’s disastrous first-half results, Costain reported an operating loss of £90m. Reported revenues were more than 20% below those of the year before. Some of this can be attributed to Covid-19, which has disrupted operations and affected profitability. But most of it comes down to a couple of exceptional items, namely issues with two major contracts.

Contractual issues hit the Costain share price

Together, these contractual problems have cost the group around £90m in lost revenue. In both these instances, there is the possibility that costs may be recouped. In fact, I think some of it will be. The problem is that these exceptional items have come so soon after last year’s exceptional items. If they start to become a regular occurrence, then they are no longer exceptional.

The thing is, Costain is actually not short of work. The group has a £4.2bn order book, with getting on for £1bn of that confirmed for next year. But what’s the point of doing work, if you can’t do it profitably. Operating margins for the group’s traditional complex delivery programmes are as low as 2%. This leaves very little room for manoeuvre. Anything but perfect execution results in a loss.

This is why Costain is now focusing on higher-margin consultancy services, with a particular interest in digital solutions. It sounds good, in theory, but whether it plays out in practice remains to be seen. More and more companies seem to be jumping on the digital solutions bandwagon. Success depends on there being enough work to go round.

It’s not all bad

Despite the negatives, Costain does have some strong tailwinds too. Its highways solutions have benefited from renewed investment commitments from the UK government. Infrastructure projects, like HS2, will be an important tool in kick-starting any economic recovery. In March, the government committed to investing £600bn in UK infrastructure over the next five years. Costain also looks set to benefit from the move towards a carbon-free society after developing its decarbonisation solutions. The group is involved in several noteworthy projects, involving carbon capture and storage, hydrogen and biogas.

Its recent equity raising diluted the ownership of existing shareholders and sent the Costain share price sharply downward. But it also gave the company a much-needed infusion of cash. Net cash now stands at around £140m and the balance sheet looks healthy.

Ultimately, I think Costain will be successful in its move into digital consultancy. But I don’t know how long the transition is going to take, or how bumpy the ride will be for its shareholders. It’s hard to see how the ‘new’ company will compare to the one we see today. The new Costain might be smaller but more profitable. With this uncertainty, I would steer away from the shares at this moment in time. While there is plenty of scope for the Costain share price to move upwards, I think there are much better companies to invest in.

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Costain benefit analysis

This is a small company with a market-cap of just £173m, but one with a really punchy dividend. Right now, it yields more than 10%, with healthy cover equivalent to 2.5 times earnings. It’s also trading at an incredibly low valuation of 5.3 times forecast earnings, which looks like a really exciting opportunity. You won’t be surprised to hear it comes with a bit of risk as well. There are other small-cap contrarian stocks worth looking at too.

Today’s report, for the half-year to 30 June, showed a small drop in underlying operating profit to £21.2m, from £23.2m last year. Markets expected a dip and chose to focus on the positives, such as the improvement in overall divisional operating margin, which climbed from 3.5% to 4%.

Orders, orders

The group also reported strong momentum in securing new work, with £1.1bn of fresh contract awards and extensions to existing contracts during the first half. At 30 June, the order book stood at £4.2bn, a rise of 13.5% year-on-year, while revenue secured for 2020 stood at £900m, some £50m more than last year.

Costain claims a robust balance sheet, with total net assets of £178.4m, including net cash of £40.8m, and a positive current asset ratio. During the first half of the year, its average month-end net cash balance stood at £63.7m, although that was down from £90.8m last year.

Today’s results include a one-off charge of £9.7m to fix a roof after the responsible subcontractor went into administration in November 2017, although this doesn’t appear in underlying numbers.

Taking the lead

CEO Alex Vaughan is driving the group’s new “Leading Edge” strategy, accelerating the group’s deployment of higher margin services “through leveraging our strong client relationships and reputation for complex programme delivery.” The aim is to deliver a blended divisional margin range of 6-7% over the medium term.

Costain is fighting back after announcing contract delays and cancellations, which included high-profile projects such as the M6 Smart Motorway, Preston distributor road, and HS2 Southern Section, while the Welsh government cancelled an upgrade to the M4 motorway at Newport.

High cover

The Costain share price is down 55% in the last three months as a result. So that explains why a company with this kind of market-cap pays such a whopping dividend. City analysts expect the yield to fall to 7.3%, which is more than respectable, and has healthy cover of 2.5. There’s scope for progression, with a forecast rise to 8.3% in 2020. Earnings should start to recover in 2020 as well, although the predicted £1.24bn will remain well below 2017’s £1.68bn. 

Costain’s strong balance sheet and healthy order book should encourage investors after two dismal years. Its recovery could have further to run, provided you understand the risks.

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But digging a little deeper, the firm has performed well over the past four years or so with generally rising revenue, normalised earnings and dividends. If you are comfortable with the inevitable cyclicality inherent in the firm’s operations, I think Costain could be a good one to tuck away.

At the heart of UK infrastructure

Operations revolve around infrastructure in the UK’s energy, water and transportation sectors. The company aims to serve “blue-chip” clients “whose major spending plans are underpinned by strategic national needs, regulatory commitments or essential maintenance requirements.” I think it’s a good idea that the firm has a decent grasp of where the money will come from to pay for its services and why. The knowledge should help to keep operations focused and away from the temptation to stray into non-core contracts that could dissipate management energy.

The firm explains in today’s full-year results report that it aims to execute its strategy by offering a range of “innovative” services across the whole lifecycle of its clients’ assets by “integrating complex delivery, consultancy, technology and asset optimisation services.”  So, we’ll find Costain engineers, technicians, craftspeople and labourers working on the railways, highways, power infrastructure, oil & gas installations, water plants and nuclear power stations up and down the country. And they’ll be backed up with office-based engineers, draughtsmen (and women etc.), and contract management professionals.

Today’s figures look encouraging. Although revenue eased back by almost 14%, underlying operating profit rose nearly 7% and basic earnings per share shot up just over 16%. The directors expressed their confidence in the outlook by pushing up the total dividend for the year by 8.2%. Indeed, the order book ended 2018 almost 8% higher than the previous year and the directors describe the anticipated work as “higher quality” due to the firm’s “differentiated strategic positioning.” Some 90% of the orders fall into the category of repeat business, suggesting the potential for reliable incoming cash flow ahead.

An impressive evolution

It seems to me that Costain has evolved a long way from being merely an engineering and construction company, which should be some comfort to investors wary of the sector after recent high-profile failures such as Carillion. I think the company’s integrated and involved approach to working with its customer-companies should keep the business ticking over, growing gently, and out of the bankruptcy court.

We have learned today that Alex Vaughan, the current managing director of the firm’s natural resources division, will be promoted to chief executive in May. I see that as another positive because a change at the top in any business can bring new resolve and vigour to the enterprise. I view the shares as attractive.

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Evolving to survive and thrive

In today’s half-year results report, the firm explains that it is evolving into the UK’s “leading” smart infrastructure solutions company and the directors are aligning the firm with the “fast-changing” market environment, which I reckon is good news. All businesses need to adapt and modify operations over time in order to survive and thrive. Those that don’t often end up going down the tubes.

Costain asserts that it is differentiating its customer offering from those of its competitors by providing the range of integrated technology-enabled services increasingly required by its clients. The firm is making decent progress with its metamorphosis and plans to expand into a new enlarged technology centre. Around 33% of the staff are now employed in consultancy and technology roles, and Costain reckons its focused approach enhances its market position and growth prospects.

Today’s construction projects are complicated endeavours and the business aims to be well-equipped, now and in the future, to meet the challenges head-on in its traditional sectors of rail, highways, power, water nuclear, oil and gas. The plan seems to be working and today’s interim figures are good with underlying operating profit just under 7.5% higher than the equivalent period a year ago while underlying earnings per share are up just over 15%. The directors expressed their confidence in the outlook by pushing up the interim dividend a little over 8%.

Building a higher quality order book

Looking forward, the “higher quality” order book stands at £3.7bn and 90% of that the company classifies as repeat business, which bodes well for the stability of cash inflow and the ongoing prospects for the dividend. Chief executive Andrew Wyllie said in today’s report that “we are on course to deliver full-year results in line with the Board’s expectations.” City analysts following the firm have pencilled in a 17.5% increase in normalised earnings this year and a 7% uplift in 2019.

If you look at indicators for value, quality and momentum, Costain looks like the perfect share to hold in many ways. Among the attractions are a low-looking forward price-to-earnings ratio of just over 11 for 2019, a return on capital running just below 20 and a record of rising revenue and earnings over the past few years. On the flip side, there’s no doubt that the world of major construction and infrastructure projects will have a large element of cyclicality to it. But unless you are expecting a major crash in  Britain’s economy soon, which I’m not, Costain looks like a highly investable stock. Indeed, the consensus among City analysts right now is that it is a ‘strong buy’ and I’m not going to argue with that assessment.

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The construction giant saw profits jump by 26% and 10% in 2016 and 2017 respectively. And while City analysts are expecting bottom line rises to moderate in the medium term with increases of 6% forecast for this year and the next one, I reckon Costain is a great bet for those seeking sustained growth long into the future.

Indeed, the Maidenhead company’s update last month assured me of its bright profits prospects. In 2017, revenues rose 4% during 2017 to £7.3bn and Costain said that its order book remained stable at £3.9bn as of December, with £1.1bn worth of sales secured for the current year.

The small-cap’s focus on essential services like water, energy and transport means that the company can bank on reliable income growth. And as I noted last time out, rising investment in these areas is giving its revenues momentum an added injection of sauce.

An added bonus

What’s more, Costain’s bright profits outlook feeds into predictions that its dividends should keep growing at a mighty rate.

Last year’s payout increased 10% year-on-year to 14p per share, and this is expected to rise to 15.8p in the current year and to 17.9p in the following period. As a consequence, yields sit at a significant 3.4% and 3.7% for this year and next respectively.

At current prices, Costain can also be picked up on a forward P/E ratio of 12.4 times. This is far too cheap given the firm’s solid outlook, in my opinion.

Another growth great

Another hot growth stock that you need to check out today is Coats Group (LSE: COA).

The FTSE 250 firm has seen earnings swell by almost 80% over the past three years and the Square Mile’s number crunchers are expecting this scintillating progress to continue. A 10% earnings improvement is estimated for 2018, and another 9% rise for next year.

Coats — which manufactures threads and zips for the clothing industry, amog others — may not be as cheap as Costain, although a forward P/E ratio of 15.5 times is hardly extortionate given its equally impressive earnings picture.

Thanks to market share grabs, the company’s solid revenues momentum has continued, and full-year sales rose 4% in 2017 to $1.5bn. And the firm last month launched its two-year ‘Connecting for Growth’ transformation programme that looks set to keep business flowing in by setting itself up to cope with its fast-changing markets more effectively. The strategy is designed to “[add] value to our customers by being agile partners with an increased emphasis on speed, quality, value, innovation and corporate responsibility,” it said. And it should also create annualised operating cost savings of $15m by 2020.

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Show some steel

Evraz reported strong free cash flow of $1.32bn, more than double its full-year 2016 total of $659m. It has continued to reduce its net debt, down from $4.8bn to $4bn. 

Consolidated EBITDA hit $2.62bn, marking a rise of 70.2% from $1.54bn in 2016, driving up margins from 20% to 24.2%, due to strong market conditions and improvement initiatives. The group made a net profit of $759m in 2017, reversing a net loss of $188m the year before. This is all good stuff.

Raw Russia

The cash-cost of steel and raw materials in Russia did increase, mostly as a result of rouble appreciation, but that was not enough to stop the board from declaring a second interim dividend of $429.6m, or 30 cents a share, which it said reflected its confidence in the group’s financial position and outlook. The forecast yield is now a whopping 6.8%, covered 1.8 times. 

This caps an astonishing comeback, both for the company and the commodity sector in general. Incredibly, Evraz is up 523% over the past two years. That’s just reward for contrarian buyers who were willing to dive in at the peak of the January 2016 sell-off. Momentum has continued, with a 50% leap over the last six months. No wonder my Foolish colleague Alan Oscroft would be happy to buy and hold it forever.

On the Raz

Investors cannot expect more four-bagging over the next couple of years, even if earnings per share (EPS) are forecast to grow another 51% in 2018 (before falling 13% in 2019). Much of the recent run was due to the snapback after a dramatic sell-off, and the global economy may be heading into choppier waters.

However, trading at a forward valuation of 8.5 times earnings and with a PEG ratio of just 0.5, these are hardly toppy prices. Evraz is still at the mercy of forces beyond its control, such as global commodity prices, but right now they are working in its favour.

Higher Costain

Technology-based engineering solutions firm Costain Group (LSE: COST) is also having a good day, its share price up 5.31% at time of writing on publication of its results for the year ended 31 December. This is a boost for investors in the £492m company that focuses on the UK’s energy, water and transportation infrastructures. Its share price performance has been choppy lately, although it still trades almost 50% higher than three years ago.

Today investors are celebrating “another strong performance” with an 18% increase in underlying operating profit to £48.7m and a recommended 10% increase in the dividend to 14p for 2017. This puts it on a forecast yield of 3.6% for 2018, with healthy cover of 2.3.

City analysts expect steady EPS growth of 5% in 2018 and 7% the year after. Yet despite this solid outlook, its forecast valuation is undemanding, at 12.2 times earnings. In January, Edward Sheldon said Costain’s shares look attractively priced, and that still applies today.

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Today, I’m profiling two fast-growing small-cap stocks that have strong prospects going forward, yet trade at very reasonable valuations.

Liontrust Asset Management

Liontrust (LSE: LIO) is an independent asset manager based in London. The company runs a range of active funds including global equity and sustainable investing mandates. The group has recently won several industry awards including Specialist Group of the Year.

Shares in the asset manager have performed spectacularly well over the last five years, rising around 275%. A glance at past financials reveals why. Between 2012 and 2017, revenue increased from £14m to £52m, a compound annual growth rate (CAGR) of an impressive 30% and the company went from making a net loss, to generating a net profit of £6.8m. Furthermore, after reintroducing its dividend in 2013 with a payout of 1p, it lifted the distribution to 15p last year.

Looking ahead, City analysts expect the group’s momentum to continue. For the year ended 31 March 2018 sales and net profit are expected to reach £72m and £18.8m respectively. A dividend of 18.6p per share is anticipated, a yield of 3.8% at the current share price.

Yet despite this momentum, Liontrust shares look attractively valued. The stock has a forward P/E of just 12.5, which seems very reasonable, in my view. As a comparison, larger rival Schroders currently trades on a P/E of 17.2.

Of course, the £240m market cap stock is not without risks. Asset managers’ profits are generally related to the performance of global stocks markets. Therefore, a major bear market could impact profitability. Furthermore, as an ‘active’ investment manager, the group could suffer if investors continue to move away from active funds into ETFs.

But for now, it appears to have momentum. Given its attractive valuation and nice dividend yield, I believe it has long-term potential.

Costain Group

Another small-cap growth stock that looks to offer value right now is Costain Group (LSE: COST). The £490m market cap company is a technology-based engineering solutions provider that focuses on the UK’s energy, water and transportation infrastructures. It differentiates itself by offering integrated technology, consultancy, asset optimisation and complex delivery services to address the complex challenges of enhancing the nation’s infrastructure. The stock has been a strong performer over the last five years, rising almost 100%.

A trading statement released this morning revealed that business is ticking along nicely. The company said that since its August interim results, it has continued to “perform well” and that it expects to deliver full-year results in line with the board’s expectations. It≠ finished the year with a high-quality order book maintained at £3.9bn and a strong cash position of £150m. Chief Executive Andrew Wyllie commented: “Our performance is a direct consequence of our differentiation and our ability to provide the rapidly changing range of integrated services required by our major clients.”

Analysts expect sales growth of 9% for FY2017, along with a 36% surge in net profit. The dividend is anticipated to be lifted by 12%, taking the payout to 14.2p, a yield of 3%. Trading on a forward P/E of 13.9, the shares look attractively priced, in my opinion.

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The cable-and-connector manufacturer has seen its market value surge 110% over the past year and, if Friday’s explosive half-year financial report is anything to go by, we should expect this stunning ascent to keep on going. Indeed, Volex shot 6% higher on account of the latest trading update.

Sales fell 2.8% during the six months to October 1, to $161.4m as the result of an $11m drop in the company’s largest Power customer’s revenues. In better news, however, Volex saw revenues from its other clients boom 4.8% during the half year, reflecting ongoing efforts to increase its revenue streams. And at its Cable Assemblies arm, turnover jumped 8% year-on-year.

Meanwhile, the London-based business announced that operating profit clocked in at $5.1m for the first half, swinging from a loss of $4.6m a year earlier and the best result for five years.

On the mend

Volex has put in the hard yards in recent times to cut out costs in response to tough trading conditions and rising input costs, and to put it in a stronger position to generate sales in the years ahead.

Today chief executive Nat Rothschild commented: “I am pleased to report that the group has returned to profitability. The restructuring activities taken in previous periods have allowed the group to operate more efficiently and we are now seeing growth from both new and existing customers as we diversify our revenues.”

City brokers expect earnings to slump 22% in the year to March 2018, but the firm’s turnaround measures are expected to get profits propelling higher thereafter — an 11% advance is chalked in for fiscal 2019.

And despite the aforementioned share price ascent, Volex remains exceptionally priced, its forward P/E ratio of 13.5 times falling comfortably below the widely-accepted value yardstick of 15 times or below.

Given the impressive progress of the firm’s self-help measures, I am not alone in believing that this represents seriously good value.

Another cut-price corker

Costain Group (LSE: COST) is another small-cap that merits serious attention at current prices, in my opinion.

Earnings are predicted to spring 8% higher in both 2017 and 2018 and, as a consequence, the construction and engineering colossus deals on a prospective P/E multiple of just 12.7 times.

Additionally, chunky dividend yields of 3.3% and 3.7% for 2017 and 2018 respectively — driven by the company’s ultra-progressive payout policy — should provide plenty of incentive to give Costain a look.

The billions of pounds that is being thrown at improving Britain’s transportation, energy and water infrastructure continues to drive business at Costain, and as a result reported revenues at the firm leapt 11.5% during the first half to £847.8m. Reported pre-tax profit grew 38.9% to £15.7m.

And its fat order book, which stood at £3.7bn as of June, 90% of which was for repeat business, suggests sales, profits and dividends should keep growing at an eye-popping pace. Costain is a company that could make share pickers exceptionally rich in the coming years.

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Counting the Costain

Costain, which deploys technology-based solutions across the UK’s energy, water and transportation infrastructures, has reported a strong performance, leaving the group on course to deliver full-year results in line with the board’s expectations.

Group revenues, including share of joint ventures and associates, increased more than 10% from £791.4m to £874.5m, with underlying operating profit up 34% to £21.2m. Costain now sits on a comfortable net cash balance of £87.5m, up from £69.2m in 2016.

Welcome repeat

Its order book also looks healthy at £3.7bn, of which more than 90% is repeat business. This has dipped slightly from £3.9bn one year earlier, but tendering levels remain high. It reports that more than £1.5bn of revenue has been secured for the full year, up from £1.4bn this time last year.

Chief executive Andrew Wyllie said Costain is transforming rapidly to differentiate itself as the UK’s leading smart infrastructure solutions company. “We are delivering technology-based solutions demanded by our clients who are spending billions of pounds, underpinned by legislation and regulation, to meet ever more complex challenges to enhance the nation’s infrastructure.”

Dividend hike

Investors can reap the rewards in terms of a 10% increase in the interim dividend to 4.75p per share and the stock is now on a forecast yield of 3.2%, nicely covered 2.3 times, which leaves plenty of scope for future progression. Valued at a forecast 13.4 times earnings, you are not paying over the odds for Costain’s strong income and growth prospects either. Analysts forecast steady rather than spectacular earnings per share (EPS) growth of 7% in both 2017 and 2018, but after today’s results the investment case looks strong to me.

Meaty Beatty

Construction group Balfour Beatty (LSE: BBY) has endured a troubled few years, with the share price trading slightly lower than it did five years ago. However, last week’s half-yearly results were also well received, with the share price up 5% in early trading after a 69% rise in underlying pre-tax profits to £22m. Its order book dipped slightly to £11.4bn, although management suggested this was primarily due to chasing quality rather than quantity.

Balfour Beatty was able to hike its interim dividend by a whopping 33% to 1.2p per share, helped by an improving net cash position. However, that still leaves the stock on a forecast yield of just 1.4%, albeit generously covered 2.9 times.

Earnings growth

EPS growth prospects look strong, with a forecast 66% this year and 61% next, as the turnaround gathers pace. However, its current valuation of 39.99 times earnings suggests much of this growth is priced in, even if it is forecast to drop to 22.2 times. Balfour Beatty is on the right track and also a tempting buy, but Costain Group wins the day for me.

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Costain advised that “trading during the first half has again been strong and the group is on course to deliver results for the year in line with the board’s expectations.”

The company’s order book clocked in at a robust £3.7bn at the end of June, more than nine-tenths of which comprises repeat orders, “reflecting the strength of Costain’s long-term relationships with its customers.” And the Maidenhead business advised that it has a preferred bidder position of over £400m while tendering levels remain high.

And I believe the many billions of pounds being spent on Britain’s energy, water and transport infrastructure should keep business bubbling higher at Costain.

Great dividend growth

The City certainly expects it to keep delivering robust earnings growth, in the medium term at least, and rises of 10% and 7% are pencilled-in for 2017 and 2018 respectively.

And these perky projections, allied with Costain’s muscular balance sheet (net cash rose to £80bn as of the end of June from £69.2m a year earlier), are expected to keep dividends rising at a strong pace.

For this year a 14.7p per share dividend is expected, up from 12.7p in 2016 and yielding a handy 3.2%. And the yield jumps to 3.6% for 2018 thanks to predictions of a 16.2p reward.

Costain’s share price has drifted lower more recently, the stock retreating from recent peaks around 490p per share. But I reckon it’s only a matter of time before the small-cap resumes its upward trek and pounds to new record highs.

Cash splasher

I believe Ashtead Group (LSE: AHT) is also in great shape to keep dividends on an upward bent, enthusiasm which is also shared by the Square Mile’s army of number crunchers.

Supported by another mighty earnings rise in the year to April 2018 (a 15% advance is currently predicted), it is expected to lift the dividend to 30.3p per share from 27.5p in fiscal 2017.

This projection yields a handy-if-unspectacular 1.9%. And with Ashtead’s profits expected to rise 9% next year, another meaty dividend increase is predicted by the City — indeed, a 34.1p payout is currently anticipated, nudging the yield to 2.2%.

Ashtead continues to benefit from robust market conditions, and underlying rental revenues galloped 13% higher in the 12 months to April 2017, the firm announced last month, to £2.9bn.

The FTSE 100 star is also investing heavily in the business to harness changing market trends, such as the need for more flexible rental services. Indeed, it spent more than £400m on acquisitions last year and a further £1.1bn on capital expenditure. And the firm expects a similar capex bill in fiscal 2018 as its growth programme continues.

And I am convinced that these actions should keep Ashtead’s earnings, and dividends, skating higher in the years ahead.

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