Costain launches call for £60m of new funding

Costain is to strengthen its balance sheet to the tune of £60m by issuing 270m new shares. They will be priced at 24p. Existing shareholders will be offered three new shares for every four that they current own.

Costain, the civil engineering group with the so-strong brand name, seemed to have succeeded in persuading the world that it was safely back into its stride three years ago, only for it to suffer a string of wobbles reminiscent of Amec and Mowlem.

For the past six weeks there have been rumours that Costain was having difficult in obtaining bonds.

Announcing the group’s interim results this morning, a statement by Andrew Wyllie, chief executive, said: “In recent years, the company has experienced changing dynamics within the UK construction market reflecting a move towards larger-scale opportunities and fewer large service providers.

“Costain’s public sector and private blue-chip customers are entering into new relationships with contractors involving bigger, multi-year framework contracts. The company expects that consolidation within the UK construction market will continue and a small number of large firms will dominate the market.”

Costain’s interim financial results show a pre-tax profit of £8m which is a big improvement on the £21m loss suffered in the first half of 2006. In the last full year, Costain ended further in the red, with a pre-tax loss of £62m.

Turnover went slightly backwards to £430m, down £10m.

Segmental analysis shows an operating profit of £10m for the civil engineering division (turnover £280m) but Costain’s building operation was £3m in the red (turnover of £110m).

Costain is battling to manage its pension fund deficit. When evaluated to accounting standard IAS19, the deficit had been cut from £69m at the start of 2007 to £38m at the end of June.

The actuarial report, on 31 March 2007, points to a deficit of £45m.

The company has come up with a new contribution plan which it hopes will eliminate the deficit in less than ten years.

In the year to the end of December 2007, Costain’s payments into the scheme are set to run to £12m.

Costain addressed the issue of contract bonds saying: “It is common practice for contractors to issue performance bonds, generally at 10% of the contract value, advance payment bonds to secure upfront payments on contracts and/or retention bonds to secure the release of retained monies, usually to a maximum of 10% of the contract value.

“These bonds are at risk of being called if the contractor defaults on its contractual obligations on a project.

“Bonds are issued by specialist financial institutions. As at 13 September 2007, the company had contract bonds of £82m.

“In the event that Costain is unable to meet its commitments in relation to these contracts, these bond could become payable, leading to a call on the group’s financial resources and the group could have difficulty in obtaining additional performance bonds on satisfactory terms, or at all.

“If the group could not obtain new performance bonds it would have an impact on its ability to win new business and maintain its current operations.”