Construction business

Costain is a UK-based construction and engineering business that provides a mix of solutions and services. It utilises technology to add value to clients’ construction projects and has experience working in several industries including rail, aviation, defence, and water.

A penny stock is one that trades for less than £1. Costain shares are currently trading for 35p. At this time last year, the shares were trading for 39p, which is a 10% drop over a 12-month period. Five years ago, the shares were trading for 434p, which is a 94% drop.

Risky business

Costain has fallen foul of tougher times in the past. I believe this has contributed to its share price decline. It has a chequered record of past performance, but I am aware that past performance is not a guarantee of the future. It does look to me like things are turning around on that front, but more on that later.

Other issues that could have an impact on Costain’s growth and investment viability are the current macroeconomic headwinds. Soaring inflation, the rising cost of materials, and the supply chain crisis all have the ability to affect Costain’s operations, its balance sheet and performance, as well as investor returns. Profit margins are threatened by rising costs. The supply chain crisis could cause delays in projects and could affect customer and consumer confidence too.

A penny stock I’d buy

Costain shares look dirt cheap to me so the risk to reward ratio is favourable in my eyes. But what has helped me come to the conclusion that I would add the shares to my holdings? Well, a few things.

Firstly, the construction market here in the UK is a favourable one and currently booming. Housing construction as well as infrastructure spend is increasing. This has been exacerbated by the pandemic as many projects struggled to continue operations during the height of it. A business like Costain with its profile and presence should be primed to benefit from this upward trend.

Next, Costain has a healthy order book that should underpin future growth and performance. It currently has close to £3.5bn worth of orders on file for future and continues to hunt for new projects and business too. This order book alone should boost its balance sheet and hopefully equate to the investor returns in the longer term.

Reviewing Costain’s more recent performance, I noted that it has managed to reduce losses since 2020 and into 2021. Losses dropped from £96.1 to just £13.3m. Furthermore, revenue increased from £978m to over £1bn and this was underpinned by improving operating margin too.

With the current outlook for the UK construction industry and at just 35p per share, Costain shares are a no-brainer buy for me. My investment strategy has always been to buy and hold for the long term so I’m not expecting a quick profit or return. I’m willing to wait, but if the shares don’t perform, I won’t have lost much of my hard-earned cash on a small number of shares.

#1: Pendragon

The first company is Pendragon (LSE:PDG), an online new and used car retailer. It currently trades at 24.9p. 

Between 2020 and 2021, this business swung from a loss before tax of £25.5m to a profit before tax of £78.6m. 

This is encouraging and suggests that it has rebounded strongly from a tough time during the pandemic.

What’s more, revenue grew from £2.7bn to £3.4bn over the same period. 

Investment bank Berenberg increased its price target in March from 30p to 36p. This was chiefly because the 2021 results were slightly ahead of guidance. 

Despite this, there are potential future supply chain problems as the company emerges from the pandemic.

#2: Costain

Secondly, Costain (LSE:COST) is in prime penny stock territory. It’s currently trading at 42p and is a construction business. 

Between 2020 and 2021, this company narrowed its losses significantly. These shrank from £96.1m to just £13.3m.

In addition, revenue increased from £978m to £1.1bn. Furthermore, operating margins improved to -0.8% in 2021, up from -9.4% the previous year.

It should be noted, however, that past performance is not necessarily indicative of future performance.

With an order book of £3.4bn, the firm could be in great shape moving forward.

There are risks, however, with inflation and rising commodity costs potentially eating into future profit margins and impacting balance sheets.

#3: Pan African Resources

Finally, I’m looking closely at Pan African Resources (LSE:PAF), a gold-mining business operating in South Africa.

For the year ended June, between 2017 and 2021, profit before tax increased from £44.9m to £104m. In addition, revenue more than doubled from £125m to £368m over the same period.

Recently, the Sudanese government granted the company five exploration licenses. These cover an area of 1,100 square kilometres.

For the six months to 31 December, the company reported record gold production of 108,000 ounces and initiated a one-month share buyback scheme in April, worth £2.6m.

There’s always the possibility, however, that any future pandemic variant could halt production at the firm’s gold mines.

Overall, these three penny stocks could provide excellent growth opportunities. While there are risks associated with each company, I think their respective historical financial results are strong. What’s more, future operating environments for each firm look attractive over the long term. I will be buying shares in the companies soon.

Construction boom

Costain is a leading UK-based construction and engineering firm. It looks to apply cutting edge technology to add value to its clients’ projects. Some of the sectors it operates in include rail, aviation, water, and defence.

Penny stocks are those that trade for less than £1. As I write, Costain shares are trading for 47p. At this time last year shares were trading for 17% higher, at 57p. The drop in share price is linked to a pandemic-related hangover, as well as continued pandemic issues, coupled with current macroeconomic issues.

Why I like Costain

The UK government has committed to spending billions on infrastructure projects over the coming years. Despite macroeconomic pressures (more on these later) affecting progress, a firm such as Costain should benefit from this capital outlay. Costain has a diversified business model with operations in different sectors and provides its services to public and private sector clients. Some of the public sector clients include powerhouses such as National Grid and the Ministry of Defence. Costain should be able to leverage its position to benefit from this demand.

Costain has a decent track record of performance despite difficulties caused by the pandemic. I understand reviewing its past performance is not a guarantee of any future performance. I like to review this to gauge investment viability and potential future capabilities. It has been a profitable business with an enticing dividend in the past. 2020 was a loss-making year, however, and dividends were cut because of the pandemic.

More recently, Costain’s half-year report was encouraging, however. It showed profit before tax increased to £9.4m. Revenue increased by 2%. Full-year results are due in March 2022. Analysts are predicting earnings growth of over 20% in 2022, which should help Costain back into the black. I do understand forecasts don’t always come to fruition, however.

At current levels I consider Costain a cheap penny stock. It sports a price-to-earnings ratio of just under 20. It has paid a dividend in the past and if it returns to profitability, this dividend could be reinstated. Dividends aren’t always guaranteed, however. Finally, and perhaps most importantly for me personally, it has an excellent, cash-rich balance sheet. This will help navigate recent stormy waters as well as support growth initiatives moving forward.

Penny stocks have risks too

Costain faces macroeconomic pressures such as rising inflation and rising costs. The cost of raw materials, especially those needed in construction and infrastructure projects, has been soaring. These rising costs can affect margins and profitability. Furthermore, the rise of new Covid-19 variants could have a negative impact on some projects too, like when the pandemic first started.

I look to invest for the long term and on that basis I would add Costain shares to my holdings at current levels. I believe it is primed to benefit from the construction and infrastructure boom and the billions of pounds the UK government has committed to spending in the longer term. A robust balance sheet and a diversified model help me justify my decision.

I think a diverse portfolio of smaller companies would fit nicely alongside these investments and provide exposure to potentially faster-growing enterprises.

As the UK economy wakes up from the pandemic, I would like more exposure to these smaller firms. Especially domestic businesses, which will benefit from the UK’s economic recovery. 

Penny stocks: risks 

However, investing in penny stocks can be risky. While these companies can generate higher returns than their blue-chip peers, they can also produce losses for shareholders.

In fact, these smaller companies are much more likely to fail because they may lack the checks and balances that are in place at larger enterprises. They may also struggle to access financing during periods of economic stress. 

Still, I am comfortable with the risks of buying these smaller businesses. And with that in mind, here is a selection of penny stocks I would acquire with a lump sum of £10,000 today. 

Growth potential 

The first company on my list is Hammerson (LSE: HMSO). This company which owns a portfolio of commercial property assets across the UK, predominantly in the retail space, almost collapsed last year. 

During the pandemic, retailers across the country were forced to close, and landlords were prevented from evicting tenants who declined to pay their rent. This hit commercial property owners particularly hard.

The sector was already struggling with the rise of e-commerce before the pandemic and declining occupancy as well as rent levels. Not only has the pandemic caused significant financial stress across the retail industry, but it has also accelerated the shift towards e-commerce. 

The good news is, it appears that these trends are starting to dissipate. According to recent trading updates from Hammerson’s larger peers, Britsh Land and Landsec, there is a healthy level of interest in commercial property from institutional investors, pushing up property values. Levels of rent collection have also returned to near pre-pandemic rates. 

Footfall recovery 

Hammerson’s latest trading update (published at the end of October) showed that footfall to the company’s retail properties was around 15% to 20% below 2019 levels in September on October. On the key August bank holiday weekend, footfall even exceeded 2019 levels. Rent collection rates have also improved to around 70%. 

Of course, there is a risk that this trend could go into reverse. Further coronavirus restrictions, or an economic slump, could hurt consumer demand. This is probably the most considerable risk the group faces right now. It is impossible for me to say how additional coronavirus restrictions would impact Hammerson’s recovery. 

Considering the recent updates from Britsh Land and Landsec, I think Hammerson’s trading performance has continued to improve. That is why I would acquire the firm for my portfolio of penny stocks today. 

Booming market 

Alongside retail landlord Hammerson, I would also acquire Pendragon (LSE: PDG) for my portfolio. 

The automotive retailer has faced significant headwinds over the past two years, but it is currently riding the tailwinds of a booming second-hand car market. 

Due to the limited supply of new vehicles, a side effect of the global supply chain crisis, demand for second-hand cars has exploded. This is a great operating environment for companies like Pendragon, which specialises in second-hand and new vehicles. 

Over the past couple of months, the group has repeatedly increased its underlying profit expectations for the whole year.

At the end of July, the company informed investors that it was expecting underlying profit before tax for the year ending December 2021 to be between £55m and £60m. At the beginning of October, management hiked this target to approximately £70m. 

Champion of penny stocks

With figures showing that demand for second-hand vehicles is not letting up, I think this figure could be conservative. 

The trend of rapidly appreciating second-hand vehicle prices is unlikely to continue indefinitely. Still, when the supply chain issues resolve themselves, Pendragon is well-placed to shift to offering new vehicles. 

The company is exposed to the same risks as Hammerson. Another economic downturn or further coronavirus restrictions could hurt vehicle demand. Inflationary cost pressures may also weigh on group profit margins, impacting growth. 

Infrastructure growth

The final company I would buy is the smart infrastructure group Costain (LSE: COST). 

The UK government has earmarked tens of billions of pounds in spending for infrastructure projects over the next few years. I want some exposure to this mammoth capital outlay. I think one of the best ways to do this is to buy infrastructure companies like Costain. 

After falling to a loss last year, the company is back on the road to recovery. Its profit before tax increased to £9.4m on an adjusted basis for the first half of 2021. Meanwhile, adjusted revenues increased 2% to £556m. 

Plenty of cash 

Unlike many other construction and infrastructure businesses, Costain does not rely on debt. At the end of June, it had a net cash position of £113m. This gives the group plenty of financial flexibility to pursue its growth ambitions and capitalise on new opportunities. 

Unfortunately, this does not make the business immune to the general risks of operating in the construction sector. This sector is usually the first to suffer in any economic downturn. Rising materials costs may also place the company’s profit margins under significant pressure. This could become especially damaging if the group has signed fixed-price contracts with customers.

Despite these risks, I am optimistic about the company’s potential. I would buy the shares today as a way to invest in the UK infrastructure boom. 

The robust recovery in the marketing communications market has helped drive trading levels above all Next Fifteen’s expectations. The AIM company saw revenues shoot 40% higher in the three months to July, it said today, with organic sales improving 29% from a year earlier.

Improved trading in the second quarter pushed revenues for the half year 31% higher year-on-year (or 23% on an organic basis). Next Fifteen added that it had enjoyed “strong performances across all segments and geographies” too. Consequently it now expects results for the full fiscal year to January 2022 to beat its prior estimates.

At the moment this UK share trades on a slightly-toppy forward price-to-earnings (P/E) ratio of around 20 times. Next Fifteen said that it expects sales growth to moderate in the second half, though if trading slows faster than anticipated such an elevated valuation could bring the share price crashing down to earth again.

That said, I’d still buy the company for my own shares portfolio. City analysts expect earnings here to jump 14% in fiscal 2022. And today the business said it was planning to accelerate investment to bolster long-term growth, too. Its strong balance sheet could lead to further earnings-boosting acquisition activity as well.

A cheap UK share I’d also buy

Costain Group (LSE: COST) released fresh financial results on Tuesday. But investors haven’t been bowled over by news coming out of the UK infrastructure and engineering share and, at 62.3p per share, the small cap was last 1.6% lower on the day.

Costain bounced back into the black in the first half of 2021, it said, recording pre-tax profits of £9.1m for the period. This compares with the £92.3m loss it was forced to eat a year earlier.

Revenues at Costain rose 21% year-on-year to £556.8m, while the business chalked up £334.3m worth of new contracts in the first half. Its order book sits at around £4bn, meanwhile, giving the company strong visibility for the remainder of 2021 and beyond.

It’s possible that the UK share could struggle again if the Covid-19 crisis gets out of control. But as a long-term investor I think Costain offers plenty of investment potential as infrastructure spending in Britain takes off. Major projects include work with Highways England to upgrade the region’s road network, and with HS2 to get the huge railway project up and running.

Besides, at current prices I think Costain could be too cheap for me to miss. City brokers think earnings here will soar 33% in 2021. This leaves the small cap trading on a forward price-to-earnings growth (PEG) multiple of just 0.3. A reminder that any reading below 1 suggests that a stock could be undervalued. In addition to this Costain offers a juicy 4% dividend yield today, giving me something to sink my income-seeker teeth into.

Penny stocks I like, #1

My first pick is Costain Group (LSE:COST). Costain Group is British technology based construction and engineering firm. The Covid-19 pandemic wasn’t kind to Costain. It reported a loss of £78m for 2020. As economies reopen, analysts are predicting earnings growth of over 20% in 2022. This should propel Costain back into the black.

Reviewing past financials, Costain has been a profitable business and I expect it to be profitable once more in the future. Past financials aren’t always a surefire indicator of future performance but I use them as a gauge of a firm’s capabilities.

I believe infrastructure spending will experience a boom in the coming years. Costain Group is one of a number of penny stocks that could benefit from this. At 57p per share, it is priced considerably below its pre-crash levels of 194p per share. It also sports a 5.5% dividend yield of 2021, which is enticing.

Investing in penny stocks comes with risks and Costain is no different. Its primary risk is the pandemic and virus causing further restrictions. If this occurs, growth predictions will turn into further loss reporting. Right now, I think Costain is a cheap stock to buy and I would be happy to invest a small sum of money for the long term and add Costain to my portfolio.

Penny stocks I like, #2

My second penny stock pick is Airtel Africa (LSE:AAF). It is a provider of telecommunications and mobile money services, with a presence in 14 countries in Africa, primarily in East, Central, and West Africa. Infrastructure spending in emerging markets such as Africa is expected to continue for many years to come.

There is lots to like about Airtel Africa as a penny stock option for my portfolio. It is currently priced at 77p per share, which is 11% higher than its price of 69p back in 2019 when it first floated on the FTSE. I consider this cheap based on its performance to date and past financials.

Last year saw Airtel Africa’s revenue increase by approximately 14% to $3,908m. Pre-tax profit increased by 17% to $697m. Growth is vital for penny stocks like this. I expect its growth journey to continue especially in an emerging market such as Africa. In comparison, established markets such as Europe have seen firms like BT and Vodafone struggling to boost profits.

Based on current levels, Airtel Africa shares trade on 11 times forecast earnings. A 4.9% dividend yield further tempts me towards picking this penny stock as a serious option for my portfolio.

As with Costain, there are risks involved in investing my money in Airtel Africa. Firstly, it is in a lot of debt. This usually raises a red flag with me. If interests rate rise, investment and earnings could be affected by spiralling interest payments. Next, it is not the only player in Africa. There is lots of competition out there, which could hinder its progress and market share. 

Overall, I would be willing to invest some of my money for the long term into Airtel Africa and keep an eye on developments.

Many investors mistakenly believe that penny stocks are small companies and, therefore, riskier than blue-chip investments.

This isn’t entirely true. Any company can qualify as a penny share if its stock is trading for less than £1 (100p). This means even large businesses with multi-billion-pound valuations could be eligible. 

With that in mind, here are three penny stocks I’d buy for my portfolio today. 

Penny stocks to buy 

Photo-Me International (LSE: PHTM) operates and sells so-called instance service equipment such as photo booths, vending machines and laundry machines. This business can be incredibly profitable. Between 2015 and 2018, the company reported an average profit margin of 21%. That’s four times higher than the market average.

Unfortunately, in the past two years, profits have plunged. However, management expects growth to return in 2021. The City is forecasting a net profit of £37m for the group this year, which is up from a loss of £2.3m in 2020. Of course, this is just a projection at this stage, but I think it shows the company’s potential.

That said, if Photo-Me doesn’t meet this target, the stock could slump. Another wave of coronavirus could destabilise the recovery. Another year of losses would put pressure on its balance sheet and prevent management from reinstating its dividend.

Nevertheless, despite these risks, I’d buy this company for my portfolio of penny shares today. 

Engineering growth

One of my top investment themes for the next few years is infrastructure spending. On that theme, I think Costain (LSE: COST) could benefit from increased infrastructure spending in the years ahead. 

The engineering solutions company reported an enormous loss of £78m in 2020. As the economy recovers from the pandemic, it’s expected to move back into the black this year. What’s more, analysts are projecting earnings growth of 21% in 2022. 

This is far from guaranteed. Another coronavirus outbreak is the most considerable risk facing the business today. Another wave could inflict more losses on a group, setting its recovery back potentially years.

As with all penny stocks, this company isn’t for the faint-hearted. However, I’d buy it today as a way to invest in the infrastructure boom. 

Property market 

The final stock I’d buy for my basket of penny shares is Foxtons (LSE: FOXT). The London-based estate agent is benefitting from the UK’s housing boom.

In its latest trading update, the group said trading in the first two months of 2021 was “well ahead” of the prior-year period. It added that the pipeline of sales commissions was more than 30% higher than the same period in 2020. I think this shows the group’s potential for 2021. 

While the property market is currently booming, there’s no guarantee this will continue. That’s the most considerable risk facing the business right now. A slump in transactions could decimate group income. There’s no telling if, or when, this may happen, which suggests the outlook for the company is highly uncertain. 

Still, as penny stocks go, I think Foxtons is one of the best. That’s why I’d buy the firm today. 

These gains are in part because investors are starting to see an eventual return to ‘normality’ after the black swan event of 2020; and also because of the rotation from growth stocks back into value stocks that I identified in my post of December 2020.  In that same post I also asked whether it was already too late to invest into value stocks.

There is nothing worse as an investor than not backing a stock that you have a strong instinct will appreciate, and then having to watch from the side lines as it soars.  Hindsight can be very punishing when you have to watch gains of more than 100% from stocks that you were not quite contrarian enough to punt at what turned out to be their low.

So, when you see a stock that hasn’t really bounced back, you have to ask yourself whether it might be a late opportunity to be brave and make a contrarian investment play?  That is exactly how I currently feel about Hammerson (LSE:HMSO) and Costain Group (LSE:COST).  Both stocks are currently trading at a tiny fraction of the price that they were back in 2018, and I cannot decide whether they are a contrarian opportunity – or a total folly.

It doesn’t help that when looking at these stocks I am presented with a dilemma.  Clearly their depressed stock prices are not merely the consequence of stock market malaise, but a reflection of real underlying problems within each company.  The question is whether the markets have ‘over punished’ these stocks to such a low base that they now offer a big upside opportunity, even if their prices may never fully recover to their levels of 2018.

Moreover, my expertise are as a technology investor backing forward-leaning companies and ventures, and as a real estate investor focused on technology clusters.  To understand the prospects of shopping centres (Hammerson) or infrastructure solutions (Costain) would require a deep dive.  So my instinct in these circumstances is that an investment is best avoided… but what if two years from now these stocks did return to their 2018 levels?

Hammerson is the easier of the two to get to grips with.  The company just posted the biggest loss in its history (£1.7 billion) and, as the owner of a huge portfolio of retail properties and shopping malls, most likely now finds itself on the wrong side of history.  During 2020 its rent collection dropped to 76% and occupancy fell from 97.2% to 94.3%.

Yet during 2020 Hammerson was able to successfully execute a £800m rights issue to shore up its position, and on 12^th March its Board proposed re-establishing its dividend.  The share price initially climbed – albeit from a very low base – upon this announcement, but investor sentiment then quickly cooled again, and the price is currently at 32.78p.  There is 33% of upside if Hammerson were to return to its 52-week high of 43.50p, and an astonishing 681% of upside if the stock were to return to its price of exactly three years ago.  The latter won’t happen, but an appreciation to somewhere between these values is not unthinkable.

The trend away from physical shopping and stores will continue even after the restrictions of the pandemic come to an end.  Yet there is also a lot of pent-up demand and savings amongst consumers who are desperate for a sense of ‘normality’.  After a year of being unable to visit physical stores, there may well be a retail revival when restrictions are lifted. 

Costain Group is a different story.  In September my Motley Fool colleague Thomas Carr asked whether a crash in the stock price meant that it was time to buy Costain.  Investors who decided that the answer to the question was ‘yes’ will now be sitting on 50% gains.  There is still 75% of further upside if the Costain stock price returns to its 52-week high, and 666% of upside if the stock can recover to its price of exactly three years ago.  In that respect the potential variance in the share price is not unlike that of Hammerson.

However, even though Costain is sitting on an order book of £4.2 billion, its operating margins are wafer thin, even in good times.  In March it had to execute a £100m rights issue to shore up its balance sheet and the company has shown how losing money on just two projects undermined the profitability (and value) of the entire company, as it swung from a modest £6.6m profit on a £1.15 billion turnover in 2019 to a £96m loss in 2020. 

Whilst Hammerson’s future prospects can largely be correlated with an objective and observable external trend – the return of shoppers to malls and with them new occupants for retail units – Costain has tied its future prospects to a highly subjective ability to “transform” itself and “improve its approach to contract selection”.  And that is where I jump off from my contrarian investment fantasy when it comes to Costain.  I’m just not interested in aligning my investments with the execution of ‘organisational change’.  But I am sorely tempted to make a contrarian investment into Hammerson.

In Monday’s disastrous first-half results, Costain reported an operating loss of £90m. Reported revenues were more than 20% below those of the year before. Some of this can be attributed to Covid-19, which has disrupted operations and affected profitability. But most of it comes down to a couple of exceptional items, namely issues with two major contracts.

Contractual issues hit the Costain share price

Together, these contractual problems have cost the group around £90m in lost revenue. In both these instances, there is the possibility that costs may be recouped. In fact, I think some of it will be. The problem is that these exceptional items have come so soon after last year’s exceptional items. If they start to become a regular occurrence, then they are no longer exceptional.

The thing is, Costain is actually not short of work. The group has a £4.2bn order book, with getting on for £1bn of that confirmed for next year. But what’s the point of doing work, if you can’t do it profitably. Operating margins for the group’s traditional complex delivery programmes are as low as 2%. This leaves very little room for manoeuvre. Anything but perfect execution results in a loss.

This is why Costain is now focusing on higher-margin consultancy services, with a particular interest in digital solutions. It sounds good, in theory, but whether it plays out in practice remains to be seen. More and more companies seem to be jumping on the digital solutions bandwagon. Success depends on there being enough work to go round.

It’s not all bad

Despite the negatives, Costain does have some strong tailwinds too. Its highways solutions have benefited from renewed investment commitments from the UK government. Infrastructure projects, like HS2, will be an important tool in kick-starting any economic recovery. In March, the government committed to investing £600bn in UK infrastructure over the next five years. Costain also looks set to benefit from the move towards a carbon-free society after developing its decarbonisation solutions. The group is involved in several noteworthy projects, involving carbon capture and storage, hydrogen and biogas.

Its recent equity raising diluted the ownership of existing shareholders and sent the Costain share price sharply downward. But it also gave the company a much-needed infusion of cash. Net cash now stands at around £140m and the balance sheet looks healthy.

Ultimately, I think Costain will be successful in its move into digital consultancy. But I don’t know how long the transition is going to take, or how bumpy the ride will be for its shareholders. It’s hard to see how the ‘new’ company will compare to the one we see today. The new Costain might be smaller but more profitable. With this uncertainty, I would steer away from the shares at this moment in time. While there is plenty of scope for the Costain share price to move upwards, I think there are much better companies to invest in.

In the first half of 2019, the British engineering company was beset by contract delays and cancellations of key projects. On the financial front, revenue was 22% lower than at the same point last year, while operating profit fell by a larger 56%. To make things worse, the CEO of 14 years stepped down and the interim dividend was reduced by 26%.

On the face of it, this is a stock to avoid. But take a closer look, and things are not as bad as they first seem.

Operating profit may have been much lower year-on-year, but this was largely the result of a one-off charge of almost £10m, relating to legacy work that a now defunct subcontractor was liable for. An exceptional cost if ever there was one. Without this, underlying operating profit was only 6.7% lower – hardly a disaster.

The resilience of underlying operating profit in the face of a big reduction in sales, reflects Costain’s move towards higher-margin work. The new CEO has already set out his new strategy to turn the firm into a smart infrastructure solutions company, focusing on that higher-margin consultancy work, and moving away from complex delivery programmes where operating margins are as low as 2%.

Costain is looking to ride the wave of the fourth industrial revolution. For the firm, this means focusing on asset optimisation, smart motorways, connected and autonomous vehicles, hydrogen, and digitisation.

The order book is up to £4.2bn, with £900m of that relating to 2020, providing good visibility for the future. Costain is near the front of the queue to benefit from huge government investment in the UK’s motorway network, rail system, and water industry. Despite the contract delays that have blighted performance in the first half of 2019, its income is reliable, as its traditional work is strategically important — from a customer perspective — and thus not discretionary.

Progressive dividend

Ignoring this year’s performance, the company has enjoyed eight years of underlying profit growth, and a progressive dividend. At the time of writing, the shares trade at a discount to net asset value, at just five times last year’s earnings, and still below 10 times when accounting for an uncharacteristically poor first half.

Even after cutting the interim dividend, the current dividend yield is still 9%. And a cut to the final dividend – in line with the cut to the interim dividend – would leave a yield of 7%. Despite its low margins, Costain gets the most out of its assets, with a highly credible return on capital employed.

There are undoubted risks to short-term performance. There is a new CEO, and a company transformation that brings both strategic and execution risks. Then we have Brexit and a review of HS2, not to mention a huge cash outflow that needs to be stemmed.

But I think the market has overreacted and that downside risks are already fully priced in. At this valuation, I think this stock could be one to watch for the adventurous investor.