Costain issues second profit warning after road contract ruling

12 December 2019 | By Neil Gerrard

Alex Vaughan, chief executive of Costain

Costain has cut its forecast for its 2019 operating profit in half after the decision on a dispute over its contract to build the A465 Heads of the Valleys road was partially reversed.

The business now expects underlying operating profit for the year to 31 December 2019 to be between £17m and £19m.

Meanwhile its year-end net cash position is now expected to be around £20m, with the net cash position impacted by £40m of cash currently withheld on the A465 contract.

It is the second such warning Costain has made in six months, after it cut its operating profit forecast ahead of its half-year results in August, when it cautioned that delays to contract start dates and new awards including the M6 smart motorway and Preston distributor road meant that anticipated underling profit was down to a range of £38m-£42m.

The new warning stems from a problem on the ongoing Heads of the Valleys road project. Costain had already reported in its half-year results that the Welsh government had escalated a matter about design information under the dispute resolution mechanism in the A465 contract, which it entered into in 2015.

Initially, an adjudication found in Costain’s favour but in arbitration, the responsibility for the design information was split between both parties, which partially reversed the initial adjudication. Costain also claimed it was “contrary to the legal advice received by the group”.

Costain is now in discussion with the Welsh government to reach agreement on a financial settlement on the job, which is scheduled to complete in the first half of 2021.

Elsewhere, the company said its performance was in line with expectations in the second half of the year, with £600m of new work secured. It expected to finish the year with an order book of £4.2bn – the same size as at the end of 2018. A total of £1.1bn of Costain’s order book is accounted for by HS2 work.

Alex Vaughan, chief executive, said: "Clearly the situation regarding the A465 contract is disappointing. Elsewhere, the business is performing in line with expectations. We have secured a number of new contracts to maintain our healthy order book. We have also made good progress with our Leading Edge strategy, accelerating the deployment of higher margin services to our blue chip client base. We are confident this strategy will enhance our offer to clients, deliver higher margins and generate long term shareholder value."

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