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Why good performance is no longer being rewarded

David Price

Costain gave the market a positive, albeit very brief, update on how it performed in 2018 this morning.

Everything is in line with the board’s expectations, with healthy net cash levels and no nasty surprises.

They were rewarded with a rather modest 4.5 per cent boost to their share price, leaving it at around 339p per share. This is 31 per cent lower than its highest price over the last 52 weeks.

Why should Costain, a relatively steady performer in an unsteady market, have been shunned by investors like this over the past year?

A 31 per cent drop seems poor on the face of it, but when you measure Costain against its other large, publicly listed tier one firms, they are actually one of the best performers.

The only one of their peers with better performing shares over the past 12 months is Balfour Beatty.

On 14 December, Balfour delivered a very positive trading update saying its 2018 results would beat its previous guidance.

Its reward for this good performance – and the apparent completion of a remarkable turnaround – is a share price that today is around 24 per cent below its 52-week high.

It’s a similar story at Morgan Sindall: a good trading update was delivered in November with news that its net cash would be higher than previously expected. Its share price is around 33 per cent off its 52-week high.

Galliford Try had a mixed 2018, with strong results for its financial year ending in June 2018 offset by a £158m rights issue off the back of losses on the Aberdeen Western Peripheral Route. Its shares stand at 626.5p each, roughly 53 per cent lower than its 52-week high.

Interserve and Kier were the worst performers in 2018, with their share prices currently around 91 per cent and 66 per cent respectively below their 52-week highs.

The performance in these cases is less surprising, given the former’s heavy losses and the prospect of a debt for equity swap looming, and the latter’s £264m rights issue after being very heavily shorted.

Not a single large tier one has started 2019 with its share price higher than it was at the start of 2018, let alone a share price that is within 20 per cent of its highest level from the past 12 months. And this is in spite of some good performance and promises of better to come.

The reason contractor stocks are being hammered more, and why those who are performing well are not seeing huge demand for their shares, is because of fears for the health of the wider economy in the short term.

This is reflected in a broader downward trend in share prices across the main indices, with the FTSE 100, 250 and 350 around 16 per cent below their 52-week highs, on average. Poor, but not as poor as those in the construction.

Many of the large contractors have worked hard to rationalise operations that have ballooned after years of expansion into new markets. Many now loudly state that profit and cash are priorities ahead of growth.

This should lead to improving results, but it seems such improvement will not convince many investors to pile into the listed PLCs. At least not until confidence in the near term health of the wider economy is restored.

And that is out of their hands.

Readers' comments (1)

  • Ian Heptinstall

    Maybe this is because share prices are dominated by speculation and the expectation of rapid, short-term share price growth?

    A price of 339p values Costain at about £350M. This is significantly more than the balance sheet value, even adding in expected profit on the £4B work secured. And buying shares at £3.39 pays the selling shareholder much more than the original share buyers put into Costain in the first place (on average £0.61/share).

    If dividends are maintained, they return about 3.5% a year. Overall it doesnt look undervalued to me

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