Costain Group PLC (LON:COST) shares rocketed as the construction group’s next contract for work on the HS2 rail project was given a green signal.
Costain's joint venture company, Skanska Costain Strabag, won a £3.298bn contract to design and build the tunnels coming into the Euston station terminus.
As the coronavirus lockdown means there is no construction on-site “apart from safety-critical works”, the contract is not expected to make a significant contribution to the group's profitability until the 2021 financial year.
Costain is likely to have a 33% share of the JV, analysts suggested, meaning an estimated contract value of £1.1bn will have formed a large part of the group's £4.2bn order book at December's year end.
With the contract lasting for six or seven years, revenues are forecast to amount to around £50mln this year and ramp up to around £200mln of revenues by 2021, analysts at Liberym calculated.
Following Boris Johnson’s approval of HS2 on 11 February and the award of this contract from the government, the “marks the point where the work transitions from scheme design and preparatory work to full detailed design and construction”, Costain said, building on initial design and site preparation work carried out so far.
The High Speed 2 rail line, which has attracted criticism over the destruction of ancient woodland and over whether the massive spending will produce worthwhile benefits, is due to begin running trains in 2028-2031 depending on the construction timetable
Separately, Costain said it has won a £210mln contract by Highways England to design and build an upgrade to a section of the A30 north of Truro in Cornwall due to be complete by the end of 2023.
The work includes upgrading an 8.7-mile section between Chiverton Cross and Carland Cross from a single carriageway to a dual carriageway, together with the construction of new junctions, slip roads and bridges.
Costain said detailed design work will begin in April with works starting in the coming months once lockdown is lifted.
Shares in the company surged 33% to 73.14p on Wednesday morning, though they are still down more than 50% so far this year.
“The JV has been awarded the contract despite concerns about its financial strength, noting concerns also about the financial strength of other suppliers like Kier,” analysts at Liberum said. “The stand-by under-writing may have helped.”
With profit recognition expected to be cautious and, given the delayed start due to Covid-19, the analysts forecast zero profit contribution in the current financial year, rising to £160mln and £200mln of additional revenues, and £4mln and £7mln of additional underlying profit in the 2021 and 2022 financial years.
“We have heard elsewhere in the industry that the terms of the contracts are attractive with caps and collars limiting the risk of the supply chain, and limiting the cost to HS2. We assume neutral working capital as it uses a project bank account and therefore the increased profit should flow directly to the financial position, resulting in expected broadly neutral net cash in FY 2021,” the analysts noted.
As Costain has a £99m actuarial pension deficit, Liberum still believes the company needs to raise up to £100mln.