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Costain pulls out of waste sector after Manchester PFI losses

Costain sees “lots of opportunities” for new acquisitions, its finance director has told Construction News, after the group posted an 8 per cent increase in pre-tax profit for the six months to 30 June.

Tony Bickerstaff said Costain made “absolutely no secret” that it was accelerating the growth of the business organically and by acquisition.

“We have made three very successful acquisitions in the last two years and we will look to continue for opportunities in that space.

“So yes, I think there will be continued consolidation in the sector and we see lots of opportunities potentially going forward.”

He was responding in light of the Balfour Beatty and Carillion collapsed merger talks, which have come to an end.

Costain has failed in its largest M&A attempts in recent years, most notably for May Gurney, for which it was outbid by Kier last year, and Mouchel in 2011, with analysts consistently tipping the firm as a potential acquisition target itself.

However the company has made several bolt-on acquisitions, including for oil and gas project management firm EPC Offshore in 2013. The firm announced a £75m capital-raising plan in February which it said could support new acquisitions.

Mr Bickerstaff said that the market was shifting, with customers looking for longer-term, larger contracts with fewer organisations.

“The average contract life is five to seven years for some of these customers and they are looking to work with fewer suppliers longer term.

“They [want] suppliers to offer a broader range of services, so it’s no surprise that we are seeing more consolidation in the sector.”

The contractor posted strong interim results for H1, with ongoing strength in the infrastructure sector offsetting “weak” performance in its natural resources division, analyst Liberum highlighted.  It will no longer bid for waste contracts and recorded losses attributed to a Manchester PFI scheme (see box).

Costain’s infrastructure division recorded revenue for the period of £358.7m, up from £262.8m in H1 2013, while operating profit rose to £16.9m compared with £14.4m in the previous period.

Costain exits waste sector

Costain’s natural resources division had revenue of £169.4m, from £199.2m in H1 2013, with a loss of £2.6m, attributed to costs on its Manchester Waste PFI awarded in 2007.

Of 46 waste facilities under the contract, 36 have reached final acceptance, three are seeking final acceptance, six are in post-completion and one remains to be completed.

Design faults have been identified at four sites, including the incomplete site where testing will complete later this year.

Costain is holding talks with contract counterparties and the group’s insurers over the problems identified on the deal.

Mr Bickerstaff said exiting the sector would allow Costain to “focus on the other areas”, but did not rule out re-entering the sector in future.

He said: “It fits our strategy of focusing on the big spending customers and improving the services for them.”

The contractor has an early involvement in works being carried out at Hinkley Point C, after its appointment by EDF Energy for the cooling water systems at the nuclear power plant.

The European Commission is due to report in the autumn on whether the project is compliant with state aid rules.

Mr Bickerstaff said he was confident the commission would deliver a positive response.

“I’m very clear on this: there absolutely needs to be investment in new energy provision in this country and I think Hinkley is a very important part of that.”

He said there were exciting opportunities in the industry to allow Costain to grow over the coming years.

“We are focused on the 30 and 40 big spenders in the UK market – the energy, water and transportation sectors – and all of those organisations are predicted to spend between £30bn and £40bn per annum over the course of five years.

“We’ve got revenue of broadly around £1bn, so there is lots of headroom for us to grow and develop the business.”

In the run-up to the next general election, contractors have voiced the need for certainty in the market.

But Mr Bickerstaff was confident the political climate would not impact the company’s success, nor would a potential ‘yes’ vote on Scottish independence.

“There is a lot of the money that’s being invested in infrastructure in this country but there is not a politically based driver around that.

“All of our customers have similar drivers and demands, which are driven by regulation or legislation or a need, and there is absolutely a need to ensure this country has got 21st century infrastructure that is improving all the time and those are factors that are not politically based.”

However, the financial director agreed with the work of Sir John Armitt in creating an independent national infrastructure commission.

He said: “What John is doing, quite rightly, is saying that we need to set out a long-term plan for infrastructure in this country and I would absolutely support that.”

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