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Analysts: Costain boosted by problem PFI cancellation

Costain has reported a strong first half as pre-tax profit jumped 30 per cent, but analysts are still awaiting details of the fallout from a high-profile cancelled PFI waste contract. 

The Berkshire-based group said it was on track to meet full-year expectations, with a current order book of £3.7bn.

However, analysts were hoping for an update on the outcome of a terminated PFI Manchester waste contract. 

Greater Manchester Waste Disposal Authority (GMWDA) revealed in May that it was cancelling the £3bn 25-year deal with JV Viridor Laing.

As part of the deal, Costain was handed a £397m subcontract in 2007 to design, construct and commission 46 waste facilities across Greater Manchester.

In its half-year results last year, Costain said it had incurred losses of £15.1m from the contract

Construction News reported that GMWDA had raised concerns over the speed and quality of repair works being carried out under the deal.

Stephen Rawlinson of analysts Applied Value said today that “part of the reasons” for Costain’s strong performance was the fact that it was no longer “funding” the problem contract.

“Last year it was costing [Costain], we believe, around £1m a month, a cost taken through the P&L as a normal one rather than an exceptional,” Mr Rawlinson added.

“The gain from that was partially offset by higher bid costs and business development expense.”

Analysts at Liberum speculated over the potential outcomes from the cancelled waste contract.

One outcome, according to the analysts, is that “there is an agreement, which would provide certainty and if the cost to Costain were below £30m we would argue that this is positive, since the issues are legacy and Costain has a strong balance sheet”.

Alternatively, Liberum said there was a possibility that “there is a legal dispute, which could take years to resolve”.

It added: “From Costain’s perspective, it has an agreed scheme of remedial work and it believes it can perform these works under the existing provisions.”

The analyst continued: “It is encouraging there is no blame attributed to the supply chain by Viridor or Laing”.

Costain said today: “Discussions are ongoing with the various parties in respect of the Manchester Waste PFI contract and progress is being made.”

Investors have reacted positively to Costain’s results overall, with its share price up around 2 per cent in mid-morning trading. 

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