Costain seeks to raise £100m private equity capital

Costain has announced plans to raise new equity capital of up to £100m in the coming weeks, after revenues dropped by £326m in 2019.

The fundraising attempt has been fully underwritten by HSBC, Investec and Liberum on a standby basis, and an agreement has been reached with the company’s lenders to extend its existing bank facilities from June 2022 to September 2023, conditional on the completion of the new capital being raised by 30 June 2020.

Costain says its clients are highly focused on appointing financially strong and stable partners as their reliance on those partners has increased. 

As such, the company says that to provide additional headroom in the current environment to effectively manage working capital flows in the business, the board has concluded that it is in the best interests of the group to raise up to £100m of new equity to strengthen the group’s balance sheet.

In 2019, the company says its net cash position was impacted by a number of market factors and performance issues on certain contracts.

The group says it has implemented revised processes to ensure that suppliers are paid promptly, with the average time taken to pay invoices reduced to 34 days, moving into line with sector best practice, from 58 days in the same period in 2018, reducing cash held by £15m.

Structural market changes, including the level of cash held in joint operations and project bank accounts, have also increased pressure on the group’s general working capital requirement.

Contract issues also proved problematic for Costain in 2019, with the A465 contract landing a £37m blow to cash outflow, the Diamond arbitration costing £9.7m in the year, and delays to the start of new contracts and a contract cancellation also reducing 2019 profits by £16m.

In addition, the increased forecast costs and contract receipts on National Grid Peterborough and Huntingdon contract is expected to have a temporary working capital impact during the period of the contract, which is anticipated to complete in October 2021.

However, the company believes there is a significant opportunity for the group to capitalise on the growing infrastructure market opportunities available.

Costain’s full year results for the year ended 31 December 2019, show underlying operating profit of £17.9m (2018: £52.5m), which the company says is in line with its revised expectations as set out in a trading update on 12 December 2019.

The company also pointed to continued strong momentum in securing new work, with £1.7bn of new contract awards and extensions to existing contracts secured during the year, with the order book, as at 31 December 2019, standing at £4.2bn. 

The group says it continues to have a positive net cash position, which as at 31 December 2019 was £64.9m (2018: £118.8m). Of this, approximately £35.0m (2018: £30.0m) reflects positive timing receipts at the year end which reversed in the early part of 2020. 

Alex Vaughan, Costain’s chief executive officer, said: “2019 has been a year of transition for Costain as we began the implementation of our Leading Edge strategy to reshape and focus our business. Our underlying financial performance was impacted by delays to certain contract start dates and new awards, together with a contract cancellation and the loss resulting from the A465 arbitration. However, we are pleased that the Group has continued to secure significant new work during the year.

“The UK infrastructure markets are growing and developing rapidly, with increasing demand for innovative solutions to upgrade, enhance and decarbonise the nation’s strategic infrastructure. This is a significant opportunity for our business and we are well placed, with our breadth of integrated services, to benefit from these market dynamics.

“Strengthening our balance sheet will enable us to capitalise on these opportunities and further enhance our capabilities.”

Rothschild & Co is acting as financial adviser to Costain on the Capital Raising.