TIDMCOST
RNS Number : 9477R
Costain Group PLC
06 March 2019
Costain Group PLC
("Costain" or "the Group" or "the Company")
Results for the year ended 31 December 2018
Costain, the smart infrastructure solutions company, announces
another strong performance with an increase in underlying(1)
operating profit, a record order book and an 8% increase in the
total dividend for 2018.
2018 2017
Restated(*)
Revenue
GBP1,489.3m GBP1,728.9m
* including share of JVs and associates
GBP1,463.7m GBP1,684.0m
* reported
Operating profit
* underlying(1) GBP52.5m GBP49.1m
GBP43.1m GBP47.2m
* reported
Profit before tax
* underlying(1) GBP49.7m GBP43.8m
GBP40.2m GBP41.8m
* reported
Basic earnings per share
* underlying(1) 38.2p 32.9p
* reported 30.9p 31.1p
Net cash balance(2) GBP118.8m GBP177.7m
Dividend per share 15.15p 14.0p
* 2017 has been restated in accordance with common practice to
reflect the decision to change the accounting treatment of Research
& Development Expenditure Credits ('RDEC'), which is a
reclassification between operating profit and taxation. The 2017
reported basic earnings per share of 31.1p remains unchanged as a
result of the restatement.
1. Before other items; amortisation of acquired intangible
assets, employment related deferred consideration, an exceptional
one-off pension charge of GBP8.6 million in respect of the
equalisation of Guaranteed Minimum Pensions ('GMP') impacting UK
companies with defined benefit pension schemes and a GBP2.6 million
credit (2017: GBP2.5 million credit) for the reassessment of the
accounting treatment of RDEC
2. Net cash balance is cash and cash equivalents less
interest-bearing loans and borrowings
Highlights
-- Another strong performance
o Underlying operating profit(1) up 7% to GBP52.5 million (2017:
GBP49.1 million*), representing a further increase in Group
margin
o Revenue, including share of joint ventures and associates, of
GBP1,489.3 million (2017: GBP1,728.9 million) reflecting a lower
level of capital project activity in the year
o Net cash balance(2) of GBP118.8 million (2017: GBP177.7
million) with an average month-end net cash balance of GBP77.1
million (2017: GBP96.7 million)
-- Record order book due to differentiated strategic positioning
o Record higher-quality order book of GBP4.2 billion (2017:
GBP3.9 billion), with over 90% repeat business
o Continuing differentiation into the UK's leading smart
infrastructure solutions company
o Focus on long-term client relationships and integrated
technology-enabled services
-- Positive outlook
o Proactive alignment with rapidly-changing market and
increasing complexity of client demands
o Continued involvement in major regulatory-driven procurement
processes across our target markets
o Robust and enhanced balance sheet enabling participation in
longer-term and larger strategic contract relationships
o Confidence reflected in recommended final dividend of 10.0
pence per share (2017: 9.25 pence), increasing the total dividend
for the year by 8% to 15.15 pence per share (2017: 14.0 pence)
Dr Paul Golby CBE, chair, commented:
"This has been another strong performance for Costain, with
further growth in underlying profit at enhanced margins. We also
finished the year with a record higher-quality order book of GBP4.2
billion.
"This success has been driven by providing smart infrastructure
solutions that expertly integrate consultancy, complex delivery,
technology and asset optimisation services. Costain is at the
forefront of the rapidly-evolving UK infrastructure market, working
with our clients on a long-term, strategic basis to deliver their
progressively larger and more complex investment programmes. This
increasingly differentiated strategic positioning underpins our
ambition for continued growth."
"We announced today that Andrew Wyllie CBE, after fourteen years
as chief executive of the Company, is retiring in order to pursue a
non-executive career and that Alex Vaughan, currently managing
director of the Group's natural resources division, will be
appointed as CEO with effect from the conclusion of the Company's
AGM on 7 May 2019. On behalf of everyone at Costain, I would like
to thank Andrew for everything that he has done for the business
and to wish him and his family well for the future. We are
delighted that Alex will be taking over. He has played a major role
in the development of the Group and the implementation of its
strategy, and has the expertise and ambition to deliver the future
growth of the business.
"As a result of the strong performance across the business and
future opportunities, I am pleased to announce the Board's
recommendation of a final dividend of 10.0 pence per share,
representing an 8% increase in total dividend for the year. With a
clear purpose, strategy and record order book, I look forward to
reporting on future progress."
Enquiries:
Costain Tel: 01628 842 444
Andrew Wyllie CBE, Chief Executive
Tony Bickerstaff, Chief Financial Officer
Carolyn Rich, Investor Relations Director
Sara Lipscombe, Group Communications
Director
Instinctif Partners Tel: 020 7457 2020
Mark Garraway
James Gray
There will be a presentation to analysts today at 11.00am at
Instinctif Partners, 65 Gresham Street, London, EC2V 7NQ. To
register your attendance please contact
christine.galloway@instinctif.com
The Costain 2018 results film is available at
www.costain.com
Notes to Editors
Costain helps to improve lives with smart infrastructure
solutions across the UK's energy, water and transportation
infrastructures. We help to safeguard the security, increase the
capacity, improve customer service and drive efficiency in our
clients' infrastructure programmes. Our strategy is to become the
UK's leading smart infrastructure solutions company through our
focus on blue chip clients whose major spending plans are
underpinned by strategic national needs, regulatory commitments or
essential maintenance requirements. We offer a broad range of
innovative services across the whole life cycle of our clients'
assets by integrating complex delivery, consultancy, technology and
asset optimisation services. Our culture and values underpin
everything we do.
For more information visit www.costain.com
CHAIR'S STATEMENT
I am pleased to report that Costain has delivered another strong
performance in the year, with continued growth in underlying
profit, enhanced margins, and a record order book.
The Group has made significant progress on its transformation,
developing a strong and increasingly differentiated position in a
rapidly-evolving market environment by providing smart
infrastructure solutions that expertly integrate consultancy,
complex delivery, technology and asset optimisation services.
This is strategically positioning Costain at the forefront of
the technology revolution underway across infrastructure and
underpins our ambition for further growth.
Dividend
The Board recognises the importance of regular dividends to
shareholders and, as announced in August, has reviewed its dividend
policy following the Group's continued strong performance.
Reflecting the historical and expected future pay-out ratio, going
forward the Group will target dividend cover of around 2.5 times
underlying earnings. The Board is committed to growing the dividend
in line with earnings over the medium term.
Our strong performance and confidence in the Group's future
opportunities have resulted in the Board recommending a final
dividend of 10.0 pence per share (2017: 9.25 pence) which, if
approved, will be paid on 17 May 2019 to shareholders on the
register as at the close of business on 12 April 2019. This
represents an increase of 8% in the total dividend for the year to
15.15 pence per share (2017: 14.0 pence).
Governance
At Costain we have a Board committed to the highest standards of
governance. Our Annual Report will set out and explain the
processes we have in place to deliver long-term success while also
ensuring that the Company complies with all applicable laws and
regulations and meets the requirements of our stakeholders.
We measure the Board's effectiveness by holding an externally
facilitated evaluation every three years, the most recent of which
was in 2017, which found the Board to be well-functioning and
effective. An internal evaluation was held during the year which
reiterated that conclusion and monitored progress on actions to
help ensure the speed of transformation and organisational
development is maintained.
We welcome the changes to the Corporate Governance Code, which
came into effect for reporting periods starting 1 January 2019 and
as appropriate we are adapting to practices required by the code
and will report on these in due course.
Board and people
We announced today that Andrew Wyllie CBE, after fourteen years
as chief executive of the Company, is retiring in order to pursue a
non-executive career. He recently took up the presidency of the
Institution of Civil Engineers and is a non-executive director of
Yorkshire Water Services. Alex Vaughan, currently managing director
of the Group's natural resources division, will be appointed as CEO
with effect from the conclusion of the Company's AGM on 7 May
2019.
I would like to thank Andrew for everything that he has done for
the business and to wish him and his family well for the future.
Andrew can feel extremely proud of what he has achieved at Costain.
He leaves the Group in good health, the result of the growth
strategy which he and his colleagues have been implementing for the
last fourteen years. We are delighted that Alex will be taking
over. He has played a major role in the development of the Group
and the implementation of its strategy and has the expertise and
ambition to deliver the future growth of the business.
As previously announced, and as part of our planned Board
succession, James Morley retired as a non-executive director of the
Company, and as senior independent director, on 8 May 2018 after
the conclusion of the Group's Annual General Meeting (AGM). Jane
Lodge was appointed to act as the Company's senior independent
director with effect from the conclusion of the 2018 AGM. I would
once again like to thank James for more than 10 years of dedicated
service to Costain, during which time he has made a significant
contribution, and wish him well for the future.
The success of any company is down to the quality of its
leadership and the depth of talented and skilled people throughout
the organisation. On behalf of the Board, I would also like to
thank all of our people for their commitment, dedication and hard
work. The strong results we have achieved over several years and
the positive outlook for the future would not be possible without
them.
Corporate citizenship
Driven by our values, we take seriously our wider corporate
responsibility and the role the business plays in society. This
corporate perspective is also integral to the development of
long-term relationships with our blue-chip clients who increasingly
place a demonstrable commitment to corporate responsibility high on
their selection criteria for preferred suppliers.
Outlook
This has been a year of continued progress at Costain. The
business has delivered another set of strong results with further
growth in underlying profit at enhanced margins. We also ended the
year with a record higher-quality order book of GBP4.2 billion.
This success has been driven by providing smart infrastructure
solutions which expertly integrate consultancy, complex delivery,
technology and asset optimisation services. Costain is at the
forefront of the rapidly-evolving UK infrastructure market, working
with its clients on a long-term, strategic basis to deliver their
progressively larger and more complex investment programmes. This
increasingly differentiated strategic positioning underpins our
ambition for continued growth.
With a clear purpose, strategy and record order book, I look
forward to reporting on future progress.
Dr Paul Golby CBE
Chair
CHIEF EXECUTIVE'S REVIEW
I am pleased to report that we have delivered another strong
performance and continued to progress as a business.
We are fulfilling our purpose by improving millions of people's
lives across the UK through the deployment of technology-based
engineering solutions to address urgent national infrastructure
needs in transportation, water and energy.
Our strong trading performance is the consequence of the
implementation of our focused and ambitious strategy, our enhanced
market differentiation and robust financial management.
We are operating in a dynamic and rapidly changing market
environment influenced by major demographic, economic, social and
technology trends which are creating a wide array of exciting new
business opportunities for the Group.
Another strong trading performance
Results
The 'Costain Way' business management system ensures the
rigorous application of policies and procedures across the Group,
governing a robust approach to opportunity assessment, continual
monitoring of contract and operational performance and effective
financial management.
The planned further improvement in operating margins ensured
that underlying operating profit increased 7% to GBP52.5 million
(2017: GBP49.1 million). The reported operating profit was GBP43.1
million (2017: GBP47.2 million).
The term 'underlying' throughout this document excludes the
following items: amortisation of acquired intangible assets,
employment related deferred consideration on acquisitions, an
exceptional one-off pension charge of GBP8.6 million in respect of
the equalisation of Guaranteed Minimum Pensions impacting UK
companies with defined benefit pension schemes and a GBP2.6 million
credit (2017: GBP2.5 million credit) for the reassessment of the
accounting treatment of Research & Development Expenditure
Credits ('RDEC').
Revenue, including the Group's share of joint ventures and
associates, for the year was GBP1,489.3 million (2017: GBP1,728.9
million) reflecting a lower level of capital project activity in
the year, in line with our strategic change in mix of
activities.
Underlying profit before tax increased to GBP49.7 million (2017:
GBP43.8 million) and underlying basic earnings per share increased
to 38.2p pence (2017: 32.9 pence). Reported profit before tax was
GBP40.2 million (2017: GBP41.8 million) and reported earnings per
share were 30.9 pence (2017: 31.1 pence).
Our divisional target blended underlying operating profit margin
range remains 4%-5%, and we expect to be operating towards the
upper end of that range within the next three years. In 2019 we are
targeting further increase in profit with an enhanced margin on a
lower revenue profile, reflecting our changing mix in activities
and the timing of major regulatory-driven investment programmes,
with anticipated revenue growth in 2020.
Although we have two core operating and reporting divisions
within our business (Infrastructure and Natural Resources) we have
continued to implement our 'One Costain' philosophy which enables
us to focus our resources on identifying and securing the most
attractive business opportunities across the markets in which we
operate. Further detail on our reporting divisions' performance is
set out in the operational review.
Record order book
The Group ended the year with a record higher-quality order book
of GBP4.2 billion, reflecting our differentiation and strong market
positions. We secured over GBP1.8 billion of new contract awards
and extensions to existing contracts during the year. The order
book, which contains over 90% target cost, cost reimbursable
contracts continues to evolve to reflect our strategic positioning
in a rapidly-changing market environment.
In the second half of the year, the Group notably secured a
leading place on a six-year framework contract for Highways England
to deliver its Regional Investment Programme. One of the key
reasons for our success was our ability to meet Highways England's
required outcomes through the application of technology-led
solutions; digital modelling, improved productivity through our
smart delivery platform and data analytics for customer
insights.
Technology contracts won in the year evidence the growing
importance of technology integration in our markets reflecting the
changing nature of the requirements and spending profile of our
clients.
As a consequence of our focus on developing long-term strategic
relationships with blue-chip clients, over 90% of the order book
comprises repeat business. In addition, the Group has an increased
preferred bidder position of c GBP600 million (2017: GBP400
million).
As at 31 December 2018, the Group had secured c GBP0.9 billion
of revenue for 2019 (31 December 2017: over GBP1.1 billion secured
for 2018).
The order book provides good medium and long-term visibility and
underpins our confidence in the Group's future performance.
Strong balance sheet and robust financial management
A strong balance sheet is paramount to the success of the Group.
Evidence of financial strength and robust financial management are
prerequisites for qualification with our major clients who are
consolidating their supply chains and placing larger long-term
contracts to undertake multi-billion pound, multi-year investment
programmes.
Costain finished the year with a positive net cash balance of
GBP118.8 million, in line with expectations (31 December 2017:
GBP177.7 million), with the reduction from last year's
exceptionally high level due to the timing of receipts in that
period. Throughout the year the Group had a positive net cash
position with an average month-end net cash balance of GBP77.1
million (2017: GBP96.7 million). The period-end and month-end
balances have reduced due to a lower level of revenue and therefore
cashflow receipts and payments during the year. Going forward
average month-end and period-end net cash balances are anticipated
to trend closer to each other.
In December 2017, the Group successfully increased and extended
its total banking debt facilities to GBP191.0 million, which now
have a maturity date of June 2022. The Group maintains a regular,
constructive dialogue with its banking syndicate who remain highly
supportive of the business and its significant opportunities. In
addition, the Group has in place committed and uncommitted bonding
facilities of GBP320.0 million.
The Board believes that the Group's balance sheet, banking and
bonding facilities align the composition and structure of the
Group's funding with its prevailing strategic, operational and
investment priorities.
Dynamic and rapidly changing market environment
We are entering a new era for Costain, an era defined by the
start of the Fourth Industrial Revolution.
The Fourth Industrial Revolution is now having a global impact
and is characterised by a fusion of technology breakthroughs that
are blurring the lines between the physical, digital and biological
spheres. These breakthroughs are occurring in a number of fields
including artificial intelligence, robotics, nanotechnology,
quantum computing and biotechnology.
These developments are creating a range of new possibilities,
and consequently we are now seeing a stream of new policy
announcements, product developments and service enhancements.
In highways for example, we have recently seen the introduction
of a UK ban on the sale of petrol and diesel cars from 2040,
accelerated in Scotland to 2032. In the year, we saw the
introduction of the UK's first "Electric Streets" scheme, banning
the use of petrol and diesel vehicles on nine roads in the City of
London. During the year BMW also launched the trial of its ReachNow
"mobility as a service" offering in Seattle to compete with Uber
and Lyft. The foremost vehicle manufacturers have launched various
new electric models in the last year.
All of these developments are having a profound impact on
transport infrastructure, and the associated market participants,
and are stimulating a fundamental re-think about how national
infrastructure is provided. We are therefore seeing a rapid change
in the spending patterns of our clients, with the deployment of
emerging technology being core to their next generation of
infrastructure solutions.
We are strategically positioning Costain at the forefront of
this revolution, transforming the business into a leading smart
infrastructure solutions company. This differentiation is allowing
us to seize the wide array of exciting opportunities being created
for our business. Our considerable expertise across the integration
of technology, consultancy, asset optimisation and complex delivery
services places Costain well in this rapidly-evolving market.
During the year, we have benefited from the start of a new
generation of smart infrastructure contract awards including
delivering the first phase of the A2/M2 Connected Corridor and
participating in the Midlands Future Mobility testbed
programme.
To meet this ever-greater urgency and complexity in delivering
the UK's infrastructure needs, our major clients are also
consolidating their supply chains by investing in increasingly
long-term, collaborative multi-billion-pound programmes and service
enhancements, underpinned by redefined legislative and regulatory
imperatives.
Costain is therefore actively involved in a number of major,
regulatory driven procurement processes including the c GBP25
billion Highways England's Road Period 2 (2020-2025), the AMP7
(2020-2025) programme in the water sector with an expected Totex of
c GBP50 billion, the RIIO-1 GBP60 billion (2013-2023) period in the
energy sector and the record GBP47 billion Control Period 6
(2019-2024) for Network Rail.
These changing client trends are why we are also continuing to
invest in our skills, services and capabilities, both organically
and by targeted acquisition.
We have continued to develop the strength and experience of our
outstanding team with some 1,300 of our people working in
consultancy or technology roles, representing over one third of our
total headcount. We now have over 600 chartered professionals
across a wide range of disciplines and also sponsor 25 PhD students
who are undertaking leading-edge and targeted research at renowned
universities including Cambridge, Imperial College and
Edinburgh.
In line with society's rapidly changing attitude toward
equality, diversity and inclusion, I am delighted to advise that
for the first time in Costain's history, more than half of our
graduate intake in the year was female. We have also made
significant progress at the senior level with one third of our
Executive Board being female. We were delighted to receive for the
first time in the year, The Times newspapers' Top 50 Employers for
Women award.
To further support the development of our technology capability,
we are relocating to an enlarged technology centre in Somerset,
where some 150 dedicated staff will develop cutting edge technology
solutions for application across all our operations in water,
transportation and energy.
While there remains uncertainty about the precise terms of
Brexit, we have considered the impact on our business as part of
our risk management process. We believe that because of our
long-term regulated contract relationships with our clients, and
over 90% cost reimbursable contracts in our order book, our
business model will remain resilient under the range of most likely
scenarios.
This dynamic and rapidly changing market environment is creating
a huge and exciting opportunity for Costain, and with a focused
strategy, outstanding team and strong balance sheet, we are
well-placed to capitalise on the opportunities.
Operational review
Under our 'One Costain' operating model, the Group has two core
operating and reporting divisions within the business:
Infrastructure and Natural Resources.
Infrastructure
The division, which operates in the highways, rail and nuclear
markets, delivered revenue (including joint ventures and
associates) of GBP1,093.6 million (2017: GBP1,379.7 million) and
underlying operating profit of GBP46.0 million (2017: GBP52.4
million). The margin in the year has increased to 4.2% from 3.8%,
in line with the Group's strategic target range of 4%-5%. The
revenue and profit reduction results from a lower level of
lower-margin large capital project activity compared to the prior
year. In 2019 we are targeting an increase in profit and margin on
a lower revenue reflecting our strategic change in mix of
activities and the timing of major regulatory investment
programmes.
The division has an increased forward order book of GBP3.4
billion (2017: GBP3.0 billion).
Highways
Our highways clients are increasingly seeking technology
solutions to reduce congestion and improve the safety of the road
network. This year we successfully brought two new smart motorways
online on the M1 and the M60. We have also started work on the M1
J13-16, our largest smart motorway to date, as well as securing a
new contract to deliver the M6 J21a-26. We are providing the
signalling and sensing technologies which allow smart motorways to
operate, as well as providing project and programme management for
overall scheme delivery.
The Government and vehicle manufacturers are increasing their
investment in connected and autonomous vehicles (CAV). Costain has
secured a market leading position in CAV infrastructure by
successfully delivering the first phase of the A2/M2 Connected
Corridor and through our role on Midlands Future Mobility, the UK's
largest CAV testbed. As CAV uptake grows over the next decade, we
will continue to deliver improvements to capacity, journey time and
road safety using technology, that were previously only possible
through delivery of physical infrastructure.
We are delivering integrated maintenance and network management
services to highways infrastructure owners including Highways
England and East Sussex County Council. We are continually
increasing the efficiency and effectiveness of our operations in
this area through the application of digital technology, such as
the East Sussex Digital Network Management Hub, ultimately reducing
disruption and improving communication with communities and those
using the road network.
Our track record of successfully delivering capital investment
projects on nationally critical networks has continued in the year
with the opening of the refurbished Brynglas tunnels and the
remodelled junction 28 on the M4 for the Welsh Government. We are
also delivering the technically complex A465 Heads of the Valleys
scheme, due to be completed in 2020, and continue to make progress
with our client to resolve the effect of significant additional
scope and the associated cost and schedule impact.
We are making good progress on Highways England's major A14
upgrade contract, which is expected to deliver a significant
increase in capacity on this major transport corridor. This track
record of strong performance helped us to secure first place on
Highways England's Regional Delivery Partnership, where we will
deliver improvements to the Strategic Road Network in the north and
east regions to the value of c GBP1.5 billion over the life of the
partnership.
Our ability to manage the impact of major infrastructure
investment on communities and the environment continues to be
valued by our clients, and this year we have successfully brought
the A19 Testos Improvement and the M4 Corridor around Newport
through the statutory planning process. The expertise of our people
and the value placed on this by our clients is reflected in our
growing advisory client base including TfL, local and combined
authorities, sub-national transport bodies and central
government.
With confirmation in the Autumn 2018 Budget that there will be c
GBP25 billion of investment in roads for the period from 2020-2025,
we are well positioned to continue growing and excelling in this
market.
Rail
The rail sector in the UK is changing rapidly. Network Rail is
introducing new digital technologies to increase the capacity and
performance of the network and we are well positioned to take a key
role in the delivery of this new generation of schemes by
capitalising on our knowledge of the railway and of rail
systems.
This year we have substantially completed the GBP1.0 billion
upgrade of London Bridge Station, a flagship project for Network
Rail that not only enhances capacity at one of Britain's busiest
transport hubs but also transforms the customer experience at the
station with over seventy new shops, cafes and leisure
facilities.
Our work on High Speed 2 has continued to grow throughout the
year. We are progressing well with the enabling works contract
covering the southern section of the scheme and completing the
design work on our two main civils contracts on the southern
sections of the route.
Crossrail, which will be known as the Elizabeth Line, is one of
Europe's largest and most complex infrastructure projects and our
remaining contracts on the scheme are being completed in accordance
with supplemental agreements reached with the client. Our Crossrail
Anglia contract for Network Rail, which involved readying their
existing network east of London for the new Crossrail fleet, has
now been completed.
For London Underground, discussions are well advanced to
finalise the account for the completed Bond Street station upgrade
and the Bakerloo Line link to the Elizabeth Line at Paddington is
nearing completion.
In Scotland, we have made excellent progress on the
electrification of the routes between Stirling, Dunblane and Alloa,
which will enable faster and more environmentally friendly trains
to be introduced.
Fatal incidents at unguarded railway crossings continue to be a
source of concern for Network Rail, who have commissioned Costain
to develop and introduce a new technology that will alert
pedestrians to the presence of an approaching train. The Project
Meerkat technology has been under development throughout 2018 and
in future years we expect to be installing innovative sensor and
alarm systems up and down the railway network in the UK.
Nuclear
Costain's Nuclear team is at the heart of a number of nationally
strategic programmes in nuclear new-build and generation;
delivering energy security for the UK, decommissioning; dealing
with the UK's nuclear legacy and defence; supporting the security
of our nation.
Our programme management contract for AWE continues to exceed
performance expectations, allowing us to secure opportunities to
support AWE on other projects. The recent annual Infrastructure
Projects Authority review of the AWE project recognised the
outstanding collaborative relationship between the Costain, client
and contractors team.
Our expertise in the development of technology to solve client
problems has been recognised, with our Concrete Contamination
profiling system being highly commended at the recent NDA Supply
Chain Awards and a trial of its use on the Sellafield site being
awarded the prestigious Sellafield CEO's Award. This technology has
the potential to significantly reduce the cost of the concrete
decommissioning and waste storage programme for the UK. Another
technology being developed to treat liquid radioactive waste is
undergoing testing under contract with the MOD.
Our contract with EDF Energy to provide consulting and project
controls services across EDF's portfolio continues to grow (from 40
to 60 staff in 2018) and we are supporting the development of a
Programme Management Office to plan for the eventual shutdown and
decommissioning of all EDF reactors in the UK.
At Hinkley Point C we have substantially completed the Marine
Aggregate Jetty and have completed the logistics facilities, our
final activities for EDF NNB. The contract was affected by scope
increase and weather delays, and we are working with EDF to resolve
the impact of the associated cost implications on the contract
final account.
Our Sellafield decommissioning framework contract continues to
perform in line with expectations and provides access to
significant future revenue streams in support of the legacy
clean-up mission.
Natural Resources
The Natural Resources division, which operates in the water,
power and oil and gas markets, made further significant progress
during the period. Revenue (including share of joint ventures and
associates) was GBP390.3 million (2017: GBP343.9 million), with an
underlying operating profit of GBP14.1 million (2017: GBP5.0
million).
The significant improvement in the performance reflects growth
in the division's water and power activities. We have delivered an
improved underlying operating profit margin of 3.6% (2017: 1.5%)
and in 2019 we are aiming to be operating within our target margin
range of 4%-5% for the division, on higher revenue.
The division has a forward order book of GBP0.8 billion (2017:
GBP0.9 billion).
Water
We are now in year four of the AMP6 five-year programmes for
Thames Water, Severn Trent Water and Southern Water. We are
supporting these clients to improve water quality standards,
enhance supply resilience, meet anticipated demographic shifts and
address their Totex (capital and operational costs) efficiency
challenges. These programmes are performing well, and we are using
our full range of integrated capabilities to deliver improved
customer service, innovative solutions, and achieve significant
total whole life expenditure efficiency savings. Our AMP6 contract
with Thames Water includes an element of incentivisation, aligned
to the client's objectives, through the life of the contract and
finalised at the end of the programme.
The Thames Tideway project, on which we are in joint venture to
deliver the east section, continues to progress well and will form
an integral part of the modernisation of London's Victorian
sewerage system and significantly improve water quality in the
River Thames, providing capacity to cope with the growing demands
of the city well into the 22nd century. The tunnelling elements of
the contract commence later this year with overall completion
scheduled for 2024.
This year we completed the Shieldhall Tunnel for Scottish Water
in Glasgow, one of the largest infrastructure investments in
Scotland. The scheme is now operating successfully, improving water
quality and resilience of supply through reduced flooding in the
city's wastewater network.
Tender activity for targeted AMP7 advisory, asset delivery
programmes and capital maintenance programmes has continued through
the year, with several clients seeking contracts with early
engagement from the supply chain to help develop robust business
plans ahead of AMP7 formally commencing in 2020.
Power
Ensuring that the UK has a secure and resilient energy mix is
another area of national need in which we are playing a key
role.
The contract for the upgrade of National Grid's Peterborough and
Huntingdon compressor stations, where we are designing the solution
and managing the delivery, is progressing well. This programme of
work is part of National Grid's Emissions Reduction Project to
ensure that both compressor stations comply with the Industrial
Emissions Directive and Pollution Prevention and Control
regulations. The project will also enhance system resilience and
reduce overall risk on the National Transmission System by
replacing ageing assets with modern, efficient equipment.
We continue to provide project services to deliver the
replacement of the Humber Estuary crossing for National Grid. The
River Humber pipeline is a strategically important asset,
connecting the gas import facility at Easington on the Yorkshire
coast and providing 70-100 million cubic metres of natural gas per
day to the national network.
We also continue to secure and provide a range of asset
management, programme management, training, commercial, engineering
and other advisory services for key strategic contracts with
National Grid, Cadent, BAE Systems, Wales & West Utilities and
SSE.
Oil and Gas
Work has completed on the Hydrochloric Acid Dosing Plant and
Condensate Mercury Removal System for Total's Edradour-Glenlivet
facility and the Stella field development programme for Ithaca.
We continue to provide ongoing support services to Total and
Phillips 66 at their Immingham refineries, as well as programme
development and design services to key energy operators both on and
off-shore in the UK.
In the period we have continued to secure new contracts for our
gas process technology service offering and a number of strategic
development consultancy services. This includes the appointment by
Infrastrata PLC for the FEED design on their Islandmagee gas
storage facility in Northern Ireland, which will significantly
increase the UK's gas storage capacity.
Although the market remains subdued, there has been a noticeable
increase in new business opportunities as clients restructure their
operations and investment projects to accommodate prevailing market
conditions. We believe that oil and gas will remain an important
part of the UK's energy requirements in the medium term, thus
providing good future opportunities for Costain.
Alcaidesa
Alcaidesa is a non-core activity in Spain in which Costain owns
operating assets of two golf courses with an associated consented
parcel of land and a 624-berth marina concession, adjacent to
Gibraltar.
Revenue in the year was GBP5.4 million (2017: GBP5.3 million).
There has been an improvement in the trading returns from the
operations and some early improvement in market conditions in Spain
and we continue to review options for this non-core asset. The
operating loss in the year was GBP0.7 million (2017: GBP1.4 million
loss).
Costain Cares
The management of Safety, Health and Environment is a core value
at Costain. Through the dedicated and diligent efforts of the whole
team, the Group's Accident Frequency Rate (AFR) in the year was
0.03, which is our best-ever performance and places us at the
leading edge of our industry peer group. We have now launched our
Wellbeing Safety Environment Strategy (WiiSE) and objectives for
2019. This strategy aims to further raise the bar in terms of our
health and safety performance.
During the year, the Company was fined for a safety incident
which occurred in 2015 while undertaking work on a waste water
treatment plant. A full investigation was held following the
incident and the lessons learnt implemented across the Group.
Our clients place great emphasis on the good citizen credentials
of their strategic supply chain partners. Given the profile of
their businesses and the nature of the activities we undertake, how
we deliver our services is as important to them as what we do.
Increasingly, clients insist that their tier-one providers share
their corporate and social responsibility values and failure to do
this would mean a failure to pre-qualify for future work.
Throughout the year we continued to prioritise the health and
wellbeing of the Costain team. Initiatives include recognising and
supporting improved mental health, encouraging flexible working and
fundamentally re-evaluating traditional working practices.
We are firmly committed to gender equality in the workplace.
Across our business we are confident that men and women are paid
equally for doing equivalent roles. Our gender pay gap has reduced
to 24.25% but still reflects fewer women in senior leadership
positions. We continue to work hard to address this and are
confident of making further progress in the gender balance of the
Group to reduce our gender pay gap. For more information please
download the report from our website www.costain.com.
The Costain Charitable Foundation is the focus of the range of
charitable and community work we undertake, both individually and
as a Group. I am pleased to report that we raised nearly GBP200,000
for charitable causes in 2018.
Well-positioned for the future
This has been a year of further progress at Costain. The
business has delivered another strong result with growth in
underlying profit and an improved margin performance, as well as
ending the year with a record higher-quality order book of GBP4.2
billion.
Costain is entering a new era, with the Group winning a growing
number of technology-enabled contract awards, evidencing the
changing nature of our clients' requirements. Our expertise across
the integration of technology, consultancy, asset optimisation and
complex delivery services positions us at the forefront of the
rapidly-evolving UK infrastructure market, working with our clients
on a long-term, strategic basis to deliver their increasingly large
and complex investment programmes.
It has been a great privilege for me to be chief executive of
Costain for the last fourteen years. Much has been achieved over
that time as a result of the combined efforts of an outstanding
team and I would like to thank my colleagues for their support and
commitment. With a clear strategy, strong balance sheet and a
record order book, the business is in an excellent position to
deliver further growth in the future.
Andrew Wyllie CBE
Chief Executive
CHIEF FINANCIAL OFFICER'S REVIEW
This review brings together the key financial metrics of the
Group and sets out the matters of financial significance.
Overview
In 2018, the Group had another year of strong financial
performance with an increase in underlying operating profit and
earnings per share. This performance reflects the effective
implementation of the Group's focused strategy which has delivered
strong financial results over several years.
Revenue, including share of joint ventures and associates, was
GBP1,489.3 million for the year to 31 December 2018 (2017:
GBP1,728.9 million). Reported revenue, excluding share of joint
ventures and associates, was GBP1,463.7 million for the year to 31
December 2018 (2017: GBP1,684.0 million). The reduction in revenue
results from a lower level of capital project activity in line with
our strategic change in mix of activities.
The Group generated a 7% increase in underlying operating profit
to GBP52.5 million (2017: GBP49.1 million). The increased profit
reflects the Group's focus on long-term repeat orders with
blue-chip clients and an increased margin from the changing mix of
activities across the Group.
Reported operating profit for the year was GBP43.1 million
(2017: GBP47.2 million), with the reduction from last year due to
the impact of a one-off pension charge for the equalisation of
guaranteed minimum pensions detailed later in this report.
Underlying profit before tax for the year was GBP49.7 million
(2017: GBP43.8 million). Underlying basic earnings per share
amounted to 38.2 pence (2017: 32.9 pence).
Reported profit before tax for the year was GBP40.2 million
(2017: GBP41.8 million). Reported basic earnings per share were
30.9 pence (2017: 31.1 pence).
The results of the Group's operating divisions are considered in
the operational review section and are shown in the segmental
analysis in the financial statements.
Other items
To aid understanding of the underlying performance of the Group,
throughout the annual report underlying operating profit and
underlying profit before tax have been used. These measures exclude
'other items' which are considered to be one-off and unusual in
nature or related to the accounting treatment of acquisitions.
These include amortisation of acquired intangible assets, deferred
consideration treated as an employment expense, an exceptional
one-off pension charge in respect of the recent High Court ruling
on the equalisation of Guaranteed Minimum Pensions ('GMP') and a
reassessment of the accounting treatment of Research &
Development Expenditure Credits ('RDEC'). These 'other items' are
shown in a separate column in the consolidated income
statement.
Net finance expense
Net finance expense amounted to GBP3.2 million (2017: GBP5.7
million). The interest payable on bank overdrafts, loans and other
similar charges was GBP3.1 million (2017: GBP4.2 million) and the
interest income from bank deposits and other loans and receivables
amounted to GBP0.4 million (2017: GBP0.4 million). In addition, the
net finance expense includes the interest cost on the net
liabilities of the pension scheme of GBP0.4 million (2017: GBP1.8
million) and GBP0.1 million (2017: GBP0.1 million) unwind of
discount on deferred consideration.
Tax
The Group's effective rate of tax was 18.4% of the profit before
tax (2017: 22.0% restated). The accounting treatment of research
and development expenditure credits has been changed to include the
credits as grant income in operating profit for 2018 and restated
for 2017, previously these were included as a deduction from the
tax expense. Changes to estimates of prior year research and
development expenditure credits have been disclosed in operating
profit as 'other items', giving rise to a credit of GBP2.6 million
(2017: GBP2.5 million restated).
Dividend
The Board has recommended a final dividend for the year of 10.0
pence per share (2017: 9.25 pence per share) to bring the total for
the year to 15.15 pence per share (2017: 14.0 pence per share).
In accordance with the pension deficit recovery plan agreed with
the Trustee of The Costain Pension Scheme (CPS), the Group will
make an additional cash contribution to the pension scheme to match
the total deficit contribution to the total amount of dividends
paid to shareholders.
Shareholders' equity
Shareholders' equity increased in the year to GBP182.3 million
(2017: GBP154.0 million). The movements are detailed in the
consolidated statements of comprehensive income and expense and
changes in equity in the financial statements. The increase in the
year includes a positive movement following the re-measurement of
the Group's legacy pension scheme defined benefit obligations to
reflect current market-based assumptions.
New accounting standard - IFRS15
The new accounting standard, IFRS15 revenue recognition, is
applicable to Costain's financial statements in 2018. Full details
of the impact of the standard are included in a note to the 2018
financial statements. In summary, the main impact arises from a
change on one of the Group's long-term frameworks which has
separate performance obligations within it and under IFRS15 must be
accounted for as separate contracts rather than one long-term
framework contract. Application of IFRS15, which has no impact on
the Group's cash flow, has reduced the net assets of the Group by
GBP4.6 million on 1 January 2018 (GBP2.7 million as at 31 December
2018). As the framework completes, which is anticipated to be by
2020, it is forecast that this amount will be generated and
therefore reverse this impact on net assets.
New accounting standard - IFRS9
The new accounting standard, IFRS9 financial instruments, which
is applicable to the financial statements in 2018, did not have any
quantitative impact on the financial results.
New accounting standard - IFRS16
The new accounting standard, IFRS16 leases, will be applicable
to the financial statements in 2019. Full details of the impact of
the new standard are included in a note to the 2018 financial
statements.
Pensions
As at 31 December 2018, the Group's pension scheme deficit in
accordance with IAS19, was GBP4.2 million (2017:
GBP23.9 million). The scheme deficit position has reduced
significantly in the year due to returns on assets greater than
assumed, a fall in liabilities arising from favourable experience
over the period since the last triennial valuation, an update to
more recent mortality tables and company contributions.
The table below sets out the key details of the pension scheme
deficit calculation:
2018 2017
GBPm GBPm
Present value of defined benefit
obligations (752.7) (803.4)
------- -------
Fair value of scheme assets 748.5 779.5
------- -------
Recognised liability for defined
benefit obligations (4.2) (23.9)
------- -------
Principal actuarial assumptions
(expressed as weighted averages) % %
------- ------
Discount rate 2.80 2.50
------- -------
Future pension increases 3.00 2.90
------- -------
Inflation assumption 3.20 3.10
------- -------
In accordance with the pension regulations, a triennial
actuarial review of the Costain defined benefit pension scheme was
carried out as at 31 March 2016. In February 2017, an updated
deficit recovery plan was agreed with the scheme Trustee resulting
in cash contributions of GBP10.0 million for the 12 months to 31
March 2017 and then GBP9.6 million per annum (increasing annually
with inflation) until the deficit is cleared, which would be in
2031 on the basis of the assumptions made in the valuation and
agreed recovery plan.
In addition, as previously implemented, the Group will continue
to make an additional contribution so that the total deficit
contributions match the total dividend amount paid by the Company
each year. Any additional payments in this regard would have the
effect of reducing the recovery period in the agreed plan.
The next triennial actuarial review will be carried out as at 31
March 2019 and a revised recovery plan agreed accordingly.
Guaranteed Minimum Pension ("GMP") Equalisation
On 26 October 2018, the High Court issued a judgement involving
Lloyds Banking Group defined benefit pension schemes. The judgement
concluded that the schemes should be amended to equalise pension
benefits for men and women in relation to GMP benefits. The
judgement has implications for the majority of defined benefit
schemes with liabilities before 1997, including the Costain Pension
Scheme. In conjunction with Costain's actuarial advisors the best
estimate of the effect of GMP equalisation to the Group is an
increase of GBP8.6 million on the reported pension liabilities.
This increase in liabilities represents a past service cost and has
been recorded as a pre-tax exceptional expense on our income
statement, shown within "other items".
Contract estimates
A significant proportion of the Group's activities are
undertaken via long-term contracts. The majority of these contracts
are not fixed price in nature and are based on arrangements which
allow for change which is expected during the contract term through
the award of compensation events. Management uses detailed contract
valuations and cost forecasts when formulating its estimate of
costs and revenues and its assessments of the expected outcome of
each long-term contractual obligation. This includes, amongst other
things, consideration of the number of compensation events on the
contract, changes in the design and construction requirements, and
whether these all relate to the current obligation or create a new
obligation, the impact of any third-party factors and progress to
date on agreements with the client. Consideration is made on the
extent to which events have impacted on the cost and programme to
complete the contract and the associated level of estimation
uncertainty and appropriate accounting treatment. In reviewing the
contract estimates attention is also made to past performance on
contracts and the success or otherwise of resolving any contractual
matters.
Project Bank Accounts
Several of the Group's contracts operate an arrangement with the
client and suppliers, known as project bank accounts, whereby
monies on the contract are paid into a separate bank account
covered by a trust deed and distributed to the Group and all
suppliers, that join the trust deed, from that account. This is not
a financing arrangement but is a form of payment administration,
requested by the client, to provide transparency and security of
payments to suppliers. The Group does not operate any supplier
financing arrangements.
Cash flow and borrowings
The Group has a positive cash balance of GBP189.3 million as at
31 December 2018 (2017: GBP248.7 million) including cash held by
joint operations of GBP84.5 million (2017: GBP87.8 million). The
Group had borrowings of GBP70.5 million (2017: GBP71.0
million).
The decrease in the reported net cash balance is due to the
reversal of the exceptional level of contract receipts in 2017,
which were generated due to favourable timing at the year-end.
Throughout the year the Group had a positive net cash position with
an average month-end net cash balance of GBP77.1 million (2017:
GBP96.7 million). The Group cash position is impacted by
significant levels of work in progress on its large contracts and
the period-end and month-end balances have reduced due to a lower
level of revenue and therefore cashflow receipts and payments
during the year.
Order Book
During the year, the Group secured several new contracts and
extensions and the Group's order book was increased to GBP4.2
billion (31 December 2017: GBP3.9 billion).
The Group's order book is made up of an estimate of the value
remaining on secured contracts, framework arrangements, service
delivery arrangements and purchase orders. Several of the Group's
contracts have an early contractor involvement ('ECI') phase which
involves planning activities and preparation pre-construction, in
this case the Group's order book also includes the estimated value
of the associated construction activities.
Contract bonding and banking facilities
The Group has in place banking and bonding facilities from banks
and surety bond providers to meet the current and projected usage
requirements. In December 2017, the Group increased its banking
facilities to GBP191.0 million and extended the maturity date to 25
June 2022 with its relationship banks. These facilities are made up
of a GBP131.0 million revolving credit facility and a GBP60.0
million term loan.
In addition, the Group has in place committed and uncommitted
bonding facilities of GBP320.0 million. Utilisation of the total
bonding facilities on the 31 December 2018 was GBP102.7 million (31
December 2017: GBP108.0 million).
Capital allocation
A key element in the successful implementation of the Group's
strategy is the efficient allocation of capital. The Board
regularly reviews the appropriate allocation with regard to
ensuring that the Group can effectively exploit available organic
and acquisition opportunities, deliver on its ongoing obligations,
including making regular returns to shareholders, and address the
Group's legacy pension contribution commitments. In addition,
maintaining a strong and flexible balance sheet is a key
requirement from clients for the pursuit of large long-term
contracts. Typically, the Group will maintain a net cash balance,
while being prepared to take on modest leverage if circumstances
warrant. The Board believes that its approach to the optimal
deployment of capital generates value for all stakeholders on an
efficient and equitable basis.
Treasury
The Group's treasury and funding activities are undertaken by a
centralised treasury function. Its primary activities are to manage
the Group's liquidity, funding and financial risk, principally
arising from movements in interest rates and foreign currency
exchange rates.
The Group's policy is to ensure that adequate liquidity and
financial resources are available to support the Group's growth,
while managing these risks and not to engage in speculative
transactions. Group Treasury operates as a service centre within
clearly defined objectives and controls and is subject to periodic
review by internal audit.
Liquidity risk
The Group finances its operations primarily by a mixture of
working capital, funds from shareholders, retained profits and
borrowings. The directors regularly monitor cash usage and forecast
usage to ensure that projected financing needs are supported by
adequate cash reserves or bank facilities.
Foreign currency exposure
Translation exposure: the results of the Group's overseas
activities, mainly non-core activities in Spain, are translated
into sterling at rates approximating to the foreign exchange rates
ruling at the dates of the transactions. The balance sheets of
overseas subsidiaries and investments are translated at foreign
exchange rates ruling at the balance sheet date. The Group holds a
currency hedge against the assets held in its Spanish
subsidiary.
Transaction exposure: the Group has transactional currency
exposures arising from overseas supply purchases for business in
the UK and from subsidiaries' commercial activities overseas. Where
appropriate, the Group requires its subsidiaries to use forward
currency contracts to minimise any currency exposure unless a
natural hedge exists elsewhere within the Group.
Interest rate risks and exposure
The Group enters into financial instruments, where necessary, to
finance its operations. Various financial instruments (for example,
trade receivables and trade payables) arise directly from the
Group's operations. The main exposure to interest rate fluctuations
within the Group's operations arises from surplus cash, which is
generally deposited with the Group's relationship banks, and bank
borrowings against which the Group holds the appropriate interest
rate hedging arrangements.
Anthony Bickerstaff
Chief Financial Officer
6 March 2019
Principal Risks and Uncertainties
The table below sets out the principal risks faced by the
Company, the link to the Company's strategic priorities, movement
in the risk score, examples of relevant controls and mitigating
factors and risk appetite.
Principal Description and Controls and key
Risk impact mitigations Change in the year
1 Failure to prevent Safety, Health and Activity in 2018
Failure a major accident Environment (SHE)management forms part of our
to prevent or incident for policies and procedures. three-year SHE strategy
a major which Costain is SHE Strategy & Plans. which is now reaching
accident/hazard held primarily accountable The Costain Behavioural its conclusion.
resulting in personal Safety (CBS) programme. The trailing indicators
or environmental that the strategy
harm, operational targeted - Reportable
loss, regulatory, Injuries, Lost Time
legal or financial Injuries and Environmental
penalties and/or Incidents have all
reputational loss. fallen in the year.
The overall rate
of each has fallen
to around half the
2016 figure in line
with our "Halving
Harm" ambition.
============================ ============================ ======================================
2 The delivery of Board annual approval Appointment of capability
Failure the future strategy of plans, setting leads.
to deliver involves growth the strategic direction Rigorous review
the in several business and confirming strategic of M&A targets which
business areas. Specifically, choices that are could have cross-sector
strategy transforming our embedded in targets benefit.
integrated service across the business. A number of key
offering of consultancy, Technology & consultancy hires in 2018.
technology, complex strategy Appointment of and
delivery and asset and business plan upskilling of key
optimisation which Implementation. account directors.
is fundamental to Strengthening of A review of the
our future success. our leadership team top 30 roles to
Failure to manage to deliver in growth ensure we have the
this risk could areas including right people to
result in unsuccessful monthly reporting deliver the business
transformation, to the Executive plan.
new opportunities Board on the progress
being missed and/or of the key hires.
loss of stakeholder
confidence.
============================ ============================ ======================================
Failure to maintain Treasury function Level of bank and
3 a strong balance experienced in the bonding facilities
Failure sheet may limit management and oversight maintained.
to maintain our ability to grow of investments. Strengthening of
a strong due to failure to Bank and surety processes and monitoring
balance win work, inability bonding facilities of key controls.
sheet to maintain competitive maintained
scale or failure to deliver finance
to maintain adequate requirements.
working capital. Robust monitoring
and management of
amounts receivable.
============================ ============================ ======================================
4 Costain's business Focus on key, blue-chip Appointing and upskilling
Failure strategy depends clients and understanding of key
to identify on winning work their needs including account directors.
and secure in both current, appointment of key In addition, we
new work changing and diversified account directors. have allocated a
markets to maintain, Delivery of consultancy greater proportion
grow and diversify and technology services of our work winning
a profitable future via strategic acquisitions. expenditure to technology
business which delivers Continuing to develop and consultancy
stakeholder value. and maintain strong opportunities and
Failure to adequately relationships with will continue to
manage this risk customers and strategic do so in 2019.
may mean that we partners.
fail to win work
from current clients
and/or new clients,
resulting in an
inability to demonstrate
our diversified
capability and failure
to meet our profit
targets.
============================ ============================ ======================================
5 The attraction, A defined people In 2018 we have
Failure retention and succession strategy based on continued to drive
to attract of the right people culture, Equality a positive HR strategy
and transform with the right skills Inclusion and Diversity through the attraction,
the skills, in the right role (EDI), wellbeing, development and
capabilities at the right time, training and development, retention of our
and competence underpins the achievement reward and recognition. key capabilities.
of our of the Costain business Comprehensive and Overall engagement
resources strategy. Failure planned approach across the business
to manage this risk to address the consultancy, is strong (79%)
may result in an technology and advisory measured through
inability to grow resource requirements. our people survey.
the business as Strategic succession
planned and impact planning which targets
short term performance. the right competencies.
============================ ============================ ======================================
6 Costain has a strong Risk assessment Improved joint venture
Failure reputation for project prior to contract governance.
to manage delivery, with over commitments. Strategic key hires
projects 90% repeat orders. Tender work winning to manage risks
effectively Failure to maintain gate controls with associated with
discipline in managing appropriate delegated specialist projects.
our projects could authorities and Implementation of
result in, for example, Executive Investment commercial deep
disputes, design Panel sign-off for dive reviews on
faults and rectification appropriate opportunities. key projects.
works, failure of Robust financial
our supply chain, management and weekly
refusal of insurance leading indicator
claims for loss reporting.
and/or increased
compensation events
which may not be
fully reimbursable.
============================ ============================ ======================================
7 Failure to manage Funding arrangement Favourable market
Failure the legacy defined agreed with Trustees movements have reduced
to manage benefit pension after each triennial the scheme deficit
the legacy scheme so that the valuation (next by more than the
defined liabilities are valuation in 2019). agreed recovery
benefit within a range appropriate Regular reviews plan. The scheme
pension to its capital base of the pension scheme assets were changed
scheme could result in funding position in September 2018
Costain being exposed undertaken. to increase the
to additional liabilities. Investment performance level of liability
is monitored, and hedging with the
the Company provides goal of reducing
input into the scheme's the level of future
investment strategy. volatility.
============================ ============================ ======================================
8 Effectiveness, availability, Information security Move of key business
Failure security and integrity strategy that integrates systems into the
to ensure of our systems and information systems, Microsoft Cloud.
that our data are essential personnel and physical Mitigating the risk
technology for our operations. aspects to prevent, of cyber breaches
is robust, Failure to manage detect and investigate through deployment
our systems technology and data information security of an additional
are secure risks could result threats and incidents. layer of password
and in loss of confidential Engaging with key security
our data or personal data, technology partners (multi-factor-authentication).
protected. regulatory fines, and suppliers to 2019 risk mitigation,
breach of contract ensure potentially prioritises activities
and/or cyber attack. vulnerable systems to focus resources
are identified. on cyber protection
Annual penetration measures.
tests and 24-hour
threat monitoring
by an external security
company.
============================ ============================ ======================================
9 Failure to anticipate A track record of Appointment of and
Failure and respond to changing strong upskilling of key
to anticipate client circumstances, client relationships account directors.
and respond particularly where in
to changes we have new clients, target markets.
in client due to different Executive Board
circumstances market, regulatory members actively
or political conditions engage in discussions
and/or change of with regulatory
client leadership authorities.
may result in a Development of effective
reduction of work key account plans
won and impact our and appointment
profitability and of key account directors.
cashflow.
Failure to understand
and respond to the
changing marketplace
might result in
a loss of market
share as existing
clients move to
competitors and
future client needs
are not met by our
service offering.
Clients may implement
new contract conditions
which might adversely
impact our business
and financial results.
============================ ============================ ======================================
Viability statement
Prospects and viability
As part of the Group's strategy and ambition to position
ourselves at the forefront of the revolution in technology, the
Board maintains a sharp focus on assessing the Group's long-term
prospects and the company's viability as a business on a three-year
basis.
This period is considered appropriate as the Group has
reasonable visibility of secured work and pipeline of opportunities
and aligns with the period reviewed by the Board in the normal
business planning process.
Assessing Costain's prospects
Costain delivers integrated smart solutions to meet urgent
infrastructure needs across the UK. The rapidly changing market
offers the potential for long-term growth, with an addressable
market of GBP21 billion underpinned by regulation, legislation or
strategic national needs.
Costain has all the elements necessary for continued success -
valuable brand, long term strategic client relationships, highly
skilled and experienced leadership team and financial strength,
with a strong balance sheet and positive net cash balance.
The Group seeks to build on these strong foundations, with a
clear focus on broadening our integrated technology-led service
offering to bring innovative solutions to complex infrastructure
challenges.
Costain runs a rigorous annual business planning process,
involving divisional and Group management, with Board input and
oversight. This produces divisional and Group strategic plans,
which in turn generate three-year financial plans that drive the
setting of in-year budgets. At the core of this process is the One
Costain philosophy and while we operate with two divisions, we
focus our resources on identifying and securing the most attractive
opportunities across the markets we operate.
This business planning process, combined with the Group's
approach to identify, monitoring and managing risk, are a
significant contributor to the assessment of the Group's
prospects.
Factors in assessing long-term prospects
Group's current position
Responsible business, committed to the highest SHE standards and
to operating sustainably, ethically and inclusively
-- Focused strategy based on blue chip clients through long term
strategic relationships, leading to over 90% repeat business and a
record higher quality order book of GBP4.2 billion
-- A strong and robust balance sheet, with banking debt
facilities of GBP191 million to June 2022, together with committed
and uncommitted bonding facilities of GBP320 million
-- A rigorous work winning gate process where we seek to
actively manage risk of customer selection, opportunity and
contract form, adopting the 'One Costain' philosophy
-- Strong balance sheet and robust financial management;
fundamental to win work, invest and drive sustainable profitable
growth
-- Broadening our integrated technology-led service offering
with 34% of our people in consulting and technology roles
Strategic and business model
-- Clear strategy for continued organic growth and targeted acquisition
-- A clear strategy to position ourselves at the forefront of
the revolution in technology impacting our market, as a smart
infrastructure solutions company
-- Expertise in technology integration, consultancy, asset
optimisation and complex delivery. Attracting industry-leading
talent and investing in development
-- Clients are consolidating their supply chains and placing
larger long-term contracts, we have the financial strength to
capitalise on the changing procurement trends
Principal risks related to the Group's business model
The assessment of viability has been made considering the
principal risks as detailed in the Annual Report.
Impact of Brexit
The Group has completed a review of the implications of the
decision to leave the EU and assessed scenarios around the current
uncertainty as we approach the Brexit deadline of 29 March
2019.
While there remains uncertainty about the precise terms of
Brexit, we have considered the impact on our business as part of
our risk management process. We believe that because of our
long-term regulated contract relationships with our clients, and
over 90% cost reimbursable contracts in our order book, our
business model will remain resilient under the range of most likely
scenarios.
Structured strategic and financial planning process
The Group's prospects are assessed through the annual strategic
planning process, which involves the creation of three-year
divisional business plans which are reviewed in detail by the
Executive Board.
To create these plans, each division assesses external factors -
market trends, regulatory environment, legislative spend, strategic
national needs and our client's business plans, and internal
factors - including capability, skills, technology and thought
leadership.
This results in a set of objectives and a clear implementation
plan, considering known and emerging risks and opportunities over a
broader horizon. This includes a three-year financial plan,
including detailed financial forecasts, resourcing and skills plan
as well as research and development activity to support our
customers to address complex infrastructure challenges.
The Board scrutinises and monitors the strategic and financial
plans.
Assessing the Group's viability
The assessment of viability has been made considering the
principal risks and testing several plausible, but severe and
prolonged scenarios. These downside scenarios reflect a combination
of risks, including the potential impact of a significant decline
in activity resulting from an inability to secure new work, loss of
reputation from a major incident and associated fines and the
impact on working capital decline arising from a major dispute on
contract delivery.
Viability statement
In accordance with provision C.2.2 of the UK Corporate
Governance Code, the Directors have assessed the prospects of the
Group over a longer period than the 12 months required by the
'Going Concern' provisions.
Based on the results of this analysis, the Board confirms that
it has a reasonable expectation that the Group will be able to
continue in operation and meet its liabilities as they fall due
over the three-year period to 31 December 2021.
Going concern
The Directors consider that the Group and the Company have
adequate resources to remain in operation for the foreseeable
future and have therefore continued to adopt the going concern
basis in preparing the financial statements. The 2016 Code requires
the Directors to assess and report on the prospects of the Group
over a longer period. The longer-term viability statement is set
out above.
Costain Group PLC
Results for the year ended 31 December 2018
Consolidated income statement
Year ended 31 December 2018 2017 (Restated)
Other Other
Notes Underlying items Total Underlying items Total
GBPm GBPm GBPm GBPm GBPm GBPm
---------------------------------- ------ ----------- ------- ---------- ----------- ------- ----------
Continuing operations
Revenue including share of
revenue of joint ventures
and associates 1,489.3 - 1,489.3 1,728.9 - 1,728.9
Less: Share of revenue of
joint ventures and associates (25.6) - (25.6) (44.9) - (44.9)
---------------------------------- ------ ----------- ------- ---------- ----------- ------- ----------
Group revenue 1,463.7 - 1,463.7 1,684.0 - 1,684.0
Cost of sales (1,373.8) - (1,373.8) (1,595.8) - (1,595.8)
---------------------------------- ------ ----------- ------- ---------- ----------- ------- ----------
Gross profit 89.9 - 89.9 88.2 - 88.2
---------------------------------- ------ ----------- ------- ---------- ----------- ------- ----------
Administrative expenses before
other items (37.4) - (37.4) (39.1) - (39.1)
Pension GMP equalisation
charge - (8.6) (8.6) - - -
RDEC grant income - 2.6 2.6 - 2.5 2.5
Amortisation of acquired
intangible assets - (3.0) (3.0) - (3.2) (3.2)
Employment related and other
deferred consideration - (0.4) (0.4) - (1.2) (1.2)
---------------------------------- ------ ----------- ------- ---------- ----------- ------- ----------
Administrative expenses (37.4) (9.4) (46.8) (39.1) (1.9) (41.0)
---------------------------------- ------ ----------- ------- ---------- ----------- ------- ----------
Group operating profit 52.5 (9.4) 43.1 49.1 (1.9) 47.2
Share of results of joint
ventures and associates 0.3 - 0.3 0.3 - 0.3
---------------------------------- ------ ----------- ------- ---------- ----------- ------- ----------
Profit from operations 2 52.8 (9.4) 43.4 49.4 (1.9) 47.5
Finance income 3 0.4 - 0.4 0.4 - 0.4
Finance expense 3 (3.5) (0.1) (3.6) (6.0) (0.1) (6.1)
---------------------------------- ------ ----------- ------- ---------- ----------- ------- ----------
Net finance expense (3.1) (0.1) (3.2) (5.6) (0.1) (5.7)
---------------------------------- ------ ----------- ------- ---------- ----------- ------- ----------
Profit before tax 49.7 (9.5) 40.2 43.8 (2.0) 41.8
Taxation 4 (9.1) 1.7 (7.4) (9.3) 0.1 (9.2)
---------------------------------- ------ ----------- ------- ---------- ----------- ------- ----------
Profit for the year attributable
to equity holders of the
parent 40.6 (7.8) 32.8 34.5 (1.9) 32.6
---------------------------------- ------ ----------- ------- ---------- ----------- ------- ----------
Earnings per share
Basic 5 38.2p (7.3)p 30.9p 32.9p (1.8)p 31.1p
Diluted 5 37.4p (7.2)p 30.2p 32.3p (1.7)p 30.6p
---------------------------------- ------ ----------- ------- ---------- ----------- ------- ----------
The impact of business disposals in either year was not material
and, therefore, all results are classified as arising from
continuing operations.
Consolidated statement of comprehensive income and expense
Year ended 31 December
2018 2017
(Restated)
GBPm GBPm
---------------------------------------- ----------------------------------------- ---- ------ --- ------------
Profit for the year 32.8 32.6
----------------------------------------------------------------------------------- ---- ------ --- ------------
Items that may be reclassified subsequently to profit or
loss:
Exchange differences on translation of foreign
operations 0.2 0.5
Net investment hedge:
Effective portion of changes in fair value
during year 0.1 (0.7)
Net changes in fair value transferred to
the income statement - 0.2
Cash flow hedges :
Effective portion of changes in fair
value
during year (0.1) (1.4)
Net changes in fair value transferred to the
income
statement - 0.3
Total items that may be reclassified subsequently
to profit or loss 0.2 (1.1)
----------------------------------------------------------------------------------------- ------ --- ------------
Items that will not be reclassified to profit
or loss:
Remeasurement of defined benefit obligations 13.3 39.2
Tax recognised on remeasurement of defined benefit
obligations (2.5) (7.4)
----------------------------------------------------------------------------------------- ------ --- ------------
Total items that will not be reclassified to profit
or loss 10.8 31.8
----------------------------------------------------------------------------------------- ------ --- ------------
Other comprehensive income for the year 11.0 30.7
----------------------------------------------------------------------------------------- ------ --- ------------
Total comprehensive income for the year attributable
to equity holders of the parent 43.8 63.3
----------------------------------------------------------------------------------- ---- ------ --- ------------
Consolidated statement of changes in equity
Share Share Translation Hedging Retained Total
capital premium reserve reserve earnings equity
GBPm GBPm GBPm GBPm GBPm GBPm
---------------------------- --------- --------- ------------ --------- ---------- --------
At 1 January 2017 52.1 8.8 2.3 1.9 34.5 99.6
Profit for the year - - - - 32.6 32.6
Other comprehensive
income/(expense) - - - (1.1) 31.8 30.7
Issue of ordinary
shares under employee
share option plans 0.6 1.6 - - - 2.2
Shares purchased to
satisfy employee share
schemes - - - - (1.4) (1.4)
Equity-settled share-based
payments - - - - 2.2 2.2
Dividends paid 0.1 1.7 - - (13.7) (11.9)
----------------------------
At 31 December 2017 52.8 12.1 2.3 0.8 86.0 154.0
---------------------------- --------- --------- ------------ --------- ---------- --------
At 1 January 2018 52.8 12.1 2.3 0.8 86.0 154.0
Adoption of IFRS 15
'Revenue from Contracts
with Customers' - - - - (4.6) (4.6)
---------------------------- --------- --------- ------------ --------- ---------- --------
Restated total equity
at the beginning of
the financial year 52.8 12.1 2.3 0.8 81.4 149.4
Profit for the year - - - - 32.8 32.8
Other comprehensive
income/(expense) - - 0.3 (0.1) 10.8 11.0
Issue of ordinary
shares under employee
share option plans 0.5 1.6 - - (0.3) 1.8
Shares purchased to
satisfy employee share
schemes - - - - (1.3) (1.3)
Equity-settled share-based
payments - - - - 2.3 2.3
Dividends paid 0.2 1.3 - - (15.2) (13.7)
---------------------------- --------- --------- ------------ --------- ---------- --------
At 31 December 2018 53.5 15.0 2.6 0.7 110.5 182.3
---------------------------- --------- --------- ------------ --------- ---------- --------
Consolidated statement of financial position
As at 31 December
2017
Notes 2018 (Restated)
GBPm GBPm
------------------------------------ ---- ------ --- ------ --- ------------
Assets
Non-current assets
Intangible assets 7 58.5 62.5
Property, plant and equipment 40.0 43.0
Investments in equity accounted
joint ventures 0.4 0.3
Investments in equity accounted
associates 0.5 0.8
Loans to equity accounted associates 1.6 1.6
Other 3.6 4.9
Deferred tax 2.7 10.1
------------------------------------------ ------ --- ------ --- ------------
Total non-current assets 107.3 123.2
------------------------------------------ ------ --- ------ --- ------------
Current assets
Inventories 1.5 1.4
Trade and other receivables 276.5 289.7
Cash and cash equivalents 8 189.3 248.7
------------------------------------------ ------ --- ------ --- ------------
Total current assets 467.3 539.8
------------------------------------------ ------ --- ------ --- ------------
Total assets 574.6 663.0
------------------------------------------ ------ --- ------ --- ------------
Equity
Share capital 53.5 52.8
Share premium 15.0 12.1
Foreign currency translation
reserve 2.6 2.3
Hedging reserve 0.7 0.8
Retained earnings 110.5 86.0
------------------------------------------ ------ --- ------ --- ------------
Total equity attributable to equity holders
of the parent 182.3 154.0
-------------------------------------------------- --- ------ --- ------------
Liabilities
Non-current liabilities
Retirement benefit obligations 9 4.2 23.9
Other payables 0.9 1.3
Interest bearing loans and borrowings 60.5 60.6
Total non-current liabilities 65.6 85.8
------------------------------------------ ------ --- ------ --- ------------
Current liabilities
Trade and other payables 313.2 402.5
Taxation 2.6 9.0
Interest bearing loans and
borrowings 10.0 10.4
Provisions for other liabilities
and charges 0.9 1.3
------------------------------------------ ------ --- ------ --- ------------
Total current liabilities 326.7 423.2
------------------------------------------ ------ --- ------ --- ------------
Total liabilities 392.3 509.0
------------------------------------------ ------ --- ------ --- ------------
Total equity and liabilities 574.6 663.0
------------------------------------------ ------ --- ------ --- ------------
Consolidated cash flow statement
Year ended 31 December
Notes 2017
2018 (Restated)
GBPm GBPm
----------------------------------------------------- ------ ------- --- ------------
Cash flows from operating activities
Profit for the year 32.8 32.6
Adjustments for:
Share of results of joint ventures and associates (0.3) (0.3)
Finance income 3 (0.4) (0.4)
Finance expense 3 3.6 6.1
Taxation 4 7.4 9.2
Depreciation of property, plant and equipment 3.2 3.9
Amortisation of intangible assets 3.4 3.7
Employment related and other deferred consideration 0.4 1.2
Pension GMP equalisation charge 8.6 -
Shares purchased to satisfy employee share
schemes (1.3) (1.4)
Share-based payments expense 2.9 2.7
----------------------------------------------------- ------ ------- --- ------------
Cash from operations before changes in working
capital and provisions 60.3 57.3
(Increase)/decrease in inventories (0.1) 0.2
Decrease in receivables 8.6 11.3
(Decrease)/increase in payables (90.9) 3.4
Movement in provisions and employee benefits (15.8) (12.4)
----------------------------------------------------- ------ ------- --- ------------
Cash (used by)/from operations (37.9) 59.8
Interest received 0.4 0.3
Interest paid (2.4) (3.2)
Taxation paid (8.2) (5.3)
----------------------------------------------------- ------ --- ------------
Net cash (used by)/from operating activities (48.1) 51.6
----------------------------------------------------- ------ ------- --- ------------
Cash flows from/(used by) investing activities
Dividends received from joint ventures and
associates 0.5 0.1
Additions to property, plant and equipment (1.0) (1.8)
Additions to intangible assets (0.3) (0.3)
Proceeds of disposal of property, plant and
equipment and intangible assets 2.1 0.2
Repayment of loans to joint ventures and associates - 0.1
Acquisition related deferred consideration - (2.4)
Net cash from/(used) by investing activities 1.3 (4.1)
----------------------------------------------------- ------ ------- --- ------------
Cash flows from/(used by) financing activities
Issue of ordinary share capital 1.8 2.2
Ordinary dividends paid (13.7) (11.9)
Drawdown of loans 30.0 70.7
Repayment of loans (30.5) (70.0)
Net cash used by financing activities (12.4) (9.0)
----------------------------------------------------- ------ ------- --- ------------
Net (decrease)/increase in cash, cash equivalents
and overdrafts (59.2) 38.5
Cash, cash equivalents and overdrafts at beginning
of the year 8 248.7 210.2
Effect of foreign exchange rate changes (0.2) -
----------------------------------------------------- ------ ------- --- ------------
Cash, cash equivalents and overdrafts at end
of the year 8 189.3 248.7
----------------------------------------------------- ------ ------- --- ------------
Notes to the financial statements
1 Basis of preparation
Costain Group PLC ("the Company") is a public limited company
incorporated in the UK. The consolidated financial statements of
the Company for the year ended 31 December 2018 comprise the Group
and the Group's interests in associates, joint ventures and joint
operations and have been prepared and approved by the directors in
accordance with International Financial Reporting Standards as
adopted by the EU ('Adopted IFRS') and their related
interpretations.
The financial information set out herein (which was authorised
for issue by the directors on 6 March 2019) does not constitute the
Company's statutory accounts for the years ended 31 December 2018
or 2017 but is derived from those accounts. Statutory accounts for
2017 have been delivered to the Registrar of Companies, and those
for 2018 will be delivered in advance of the Company's Annual
General Meeting. The Auditors have reported on those accounts;
their reports were unqualified and did not include reference to any
matters to which the Auditors drew attention by way of emphasis
without qualifying their reports and did not contain statements
under section 498(2) or (3) of the Companies Act 2006.
Whilst the financial information included in this preliminary
announcement has been prepared in accordance with International
Financial Reporting Standards (IFRS), this announcement does not
itself contain sufficient information to fully comply with
IFRS.
The directors have acknowledged the guidance in respect of going
concern published by the Financial Reporting Council. The directors
have considered these requirements, the Group's current order book
and future opportunities and its available bonding facilities.
Having reviewed the latest projections, including the application
of reasonable downside sensitivities, the directors believe that
the Group is well-placed to manage its business risks successfully.
Accordingly, they continue to adopt the going concern basis in
preparing these financial statements.
The accounting policies set out below have been applied
consistently by the Group and the Company to each period presented
in these financial statements, except for the policy on accounting
for research and development expenditure credits (RDEC), which has
been changed in the year.
The following standards and interpretations are effective for
the year ended 31 December 2018:
- The adoption of IFRS 15 'Revenue from Contracts with
Customers' has required an adjustment to brought forward
reserves.
- The Group has also adopted IFRS 9 'Financial Instruments'
which did not have any quantitative impact on the financial
results.
The impact of the adoption of these standards and the new
accounting policies is discussed in note 11.
Significant areas of judgment and estimation
The estimates and underlying assumptions used in the preparation of
these financial statements are reviewed on an ongoing basis. Revisions
to accounting estimates are recognised in the period in which the estimate
is revised if the revision affects only that period, or in the period
of the revision and future periods if the revision affects both current
and future periods.
The most critical accounting policies and significant areas of judgement
and estimation arise from the accounting for long-term contracts under
IFRS 15 'Revenue from Contracts with Customers', the carrying value
of goodwill and acquired intangible assets and the assumptions used
in the accounting for defined benefit pension schemes under IAS 19 'Employee
benefits'.
Long-term contracts
The majority of the Group's activities are undertaken via long-term
contracts and IFRS 15 requires the identification and separation of
individual, distinct performance obligations, which are then accounted
individually. The most common type of contracts undertaken by the Group
with multiple performance obligations are framework contracts. In most
cases, the obligations are satisfied over time and estimates are made
of the total contract costs and revenues. In many cases, these obligations
span more than one financial period. Both cost and revenue forecasts
may be affected by a number of uncertainties that depend on the outcome
of future events and may need to be revised as events unfold and uncertainties
are resolved. Cost forecasts take into account the expectations of work
to be undertaken on the contract. Revenue forecasts take into account
compensation events, variations and claims and assessments of the impact
of pain/gain arrangements to the extent that the amounts the Group expects
to recover and incur can be reliably estimated and is highly probable
not to reverse based on most likely outcome.
Management bases its estimates of costs and revenues and its assessment
of the expected outcome of each long-term contractual obligation on
the latest available information, this includes detailed contract valuations,
progress on discussions over compensation events, variations and claims
with clients and forecasts of the costs to complete and, in certain
limited cases, assessments of recoveries from insurers. Revenue is recognised
to the extent that amounts forecast from compensation events, variations
and claims are agreed or considered highly probable to be agreed. The
estimates of the contract position and the profit or loss earned to
date are updated regularly and significant changes are highlighted through
established internal review procedures. The impact of any change in
the accounting estimates both positive and negative is then reflected
in the financial statements.
Management believes it is reasonably possible, on the basis of existing
knowledge, that outcomes within the next financial year could require
material adjustment. Given the pervasive impact of judgements and estimates
on revenue, cost of sales and related balance sheet amounts, it is difficult
to quantify the impact of taking alternative assessments on each of
the judgements above.
Carrying value of goodwill and intangible assets
Reviewing the carrying value of goodwill and intangible assets recognised
on acquisition requires estimation, principally, in respect of growth
rates and future cash flows of cash generating units, the useful lives
of intangible assets and the selection of discount rates used to calculate
present values are set out in note 7.
Defined benefit pension schemes
Defined benefit pension schemes require significant estimates in relation
to the assumptions for inflation, future pension increases, investment
returns and member longevity that underpin the valuation. Each year
in selecting the appropriate assumptions, the directors take advice
from an independent qualified actuary. The assumptions and resultant
sensitivities are set out in note 9.
IFRSs not applied
The following IFRSs having been endorsed, will be applicable as stated
below:
IFRS 16 'Leases' was issued in January 2016. It will result in almost
all leases being recognised on the balance sheet, as the distinction
between operating and financial leases is removed. Under the new standard,
an asset (the right to use the leased item) and a financial liability
to pay rentals are recognised. The only exceptions are short term and
low value leases.
The standard will primarily affect the accounting for the Group's operating
leases and hire charges and is mandatory for reporting periods beginning
on or after 1 January 2019. The Group is adopting the modified retrospective
approach including an exemption for leases with terms ending inside
one year of the date of initial application and will not be restating
comparative information. The impact of implementing the standard on
1 January 2019, will be an increase in right-to-use assets of approximately
GBP36.1 million and similar increase in liabilities (approximately GBP14.4
million current liabilities).
Except for IFRS 16, the directors do not currently anticipate that the
adoption of any other standard or interpretation that has been issued
but is not yet effective will have a material impact on the financial
statements of the Group in future periods.
2 Operating segments
The Group has two core business segments: Natural Resources and
Infrastructure plus the non-core business Alcaidesa in Spain. The
core segments are strategic business units with separate management
and have different core customers or offer different services. This
information is provided to the Chief Executive who is the chief
operating decision maker.
2018 Natural Infrastructure Alcaidesa Central Total
Resources costs
GBPm GBPm GBPm GBPm GBPm
Segment revenue
External revenue 383.2 1,075.1 5.4 - 1,463.7
Share of revenue of joint
ventures and associates 7.1 18.5 - - 25.6
------------------------------- ----------- --------------- ---------- -------- --------
Total segment revenue 390.3 1,093.6 5.4 - 1,489.3
------------------------------- ----------- --------------- ---------- -------- --------
Segment profit/(loss)
Operating profit/(loss) 14.1 46.0 (0.7) (6.9) 52.5
Share of results of joint
ventures and associates 0.3 - - - 0.3
------------------------------- ----------- --------------- ---------- -------- --------
Profit/(loss) from operations
before other items 14.4 46.0 (0.7) (6.9) 52.8
Other items:
Pension GMP equalisation
charge - - - (8.6) (8.6)
RDEC grant income - - - 2.6 2.6
Amortisation of acquired
intangible assets (1.4) (1.6) - - (3.0)
Employment related and
other deferred consideration (0.4) - - - (0.4)
Profit/(loss) from operations 12.6 44.4 (0.7) (12.9) 43.4
------------------------------- ----------- --------------- ---------- -------- --------
Net finance expense (3.2)
------------------------------- ----------- --------------- ---------- -------- --------
Profit before tax 40.2
------------------------------- ----------- --------------- ---------- -------- --------
2017 Natural Infrastructure Alcaidesa Central Total
Resources costs
GBPm GBPm GBPm GBPm GBPm
Segment revenue
External revenue 333.5 1,345.2 5.3 - 1,684.0
Share of revenue of joint
ventures and associates 10.4 34.5 - - 44.9
------------------------------- ----------- --------------- ---------- -------- --------
Total segment revenue 343.9 1,379.7 5.3 - 1,728.9
------------------------------- ----------- --------------- ---------- -------- --------
Segment profit/(loss)
Operating profit/(loss) 5.0 52.4 (1.4) (6.9) 49.1
Share of results of joint
ventures and associates 0.3 - - - 0.3
------------------------------- ----------- --------------- ---------- -------- --------
Profit/(loss) from operations
before other items 5.3 52.4 (1.4) (6.9) 49.4
Other items:
RDEC grant income - - - 2.5 2.5
Amortisation of acquired
intangible assets (1.5) (1.7) - - (3.2)
Employment related and
other deferred consideration (1.2) - - - (1.2)
------------------------------- ----------- --------------- ---------- -------- --------
Profit/(loss) from operations 2.6 50.7 (1.4) (4.4) 47.5
------------------------------- ----------- --------------- ---------- --------
Net finance expense (5.7)
------------------------------- ----------- --------------- ---------- -------- --------
Profit before tax 41.8
------------------------------- ----------- --------------- ---------- -------- --------
3 Net finance expense
2018 2017
GBPm GBPm
Interest income from bank deposits 0.3 0.2
Interest income on loans to related parties 0.1 0.2
----------------------------------------------- -------- --------
Finance income 0.4 0.4
----------------------------------------------- -------- --------
Interest payable on bank overdrafts, interest
bearing loans, borrowings and other similar
charges (3.1) (4.2)
Unwind of discount on deferred consideration (0.1) (0.1)
Interest cost on the net liabilities of
the defined benefit pension scheme (0.4) (1.8)
----------------------------------------------- -------- --------
Finance expense (3.6) (6.1)
----------------------------------------------- -------- --------
Net finance expense (3.2) (5.7)
----------------------------------------------- -------- --------
Other similar charges includes arrangement and commitment fees
payable. Interest income on loans to related parties relates to
shareholder loan interest receivable from investments in equity
accounted joint ventures and associates.
4 Taxation
2018 2017
GBPm GBPm
-------------------------------------------- ------- -------
On profit for the year
UK corporation tax at 19% (2017: 19.25%) (6.6) (11.0)
Adjustment in respect of prior years 3.7 (0.8)
-------------------------------------------- ------- -------
Current tax expense for the year (2.9) (11.8)
-------------------------------------------- ------- -------
Deferred tax expense for the current year (0.8) 2.5
Adjustment in respect of prior years (3.7) 0.1
Deferred tax (expense)/credit for the year (4.5) 2.6
-------------------------------------------- ------- -------
Tax expense in the consolidated income
statement (7.4) (9.2)
-------------------------------------------- ------- -------
2018 2017
GBPm GBPm
-------------------------------------------------- ------ --------
Tax reconciliation
Profit before tax 40.2 41.8
-------------------------------------------------- ------ --------
Taxation at 19% (2017: 19.25%) (7.6) (8.0)
Share of results of joint ventures and
associates 0.1 0.1
Amounts qualifying for tax relief and disallowed
expenses 0.1 (1.3)
Utilisation of previously unrecognised
temporary differences - 0.9
Rate adjustment relating to deferred taxation
and overseas profits and losses - (0.2)
Adjustments in respect of prior years - (0.7)
-------------------------------------------------- ------ --------
Tax expense in the consolidated income
statement (7.4) (9.2)
-------------------------------------------------- ------ --------
5 Earnings per share
The calculation of earnings per share is based on profit of
GBP32.8 million (2017: GBP32.6 million) and the number of shares
set out below.
2018 2017
Number Number
(millions) (millions)
---------------------------------------------------------- ----------- -----------
Weighted average number of ordinary shares in issue
for basic earnings per share calculation 106.3 104.7
Dilutive potential ordinary shares arising from employee
share schemes 2.3 2.0
---------------------------------------------------------- ----------- -----------
Weighted average number of ordinary shares in issue
for diluted earnings per share calculation 108.6 106.7
---------------------------------------------------------- ----------- -----------
6 Dividends
Dividend 2018 2017
per share
pence GBPm GBPm
------------------------------------------------- ---------- ------ ------
Final dividend for the year ended 31 December
2016 8.40 - 8.7
Interim dividend for the year ended 31 December
2017 4.75 - 5.0
Final dividend for the year ended 31 December
2017 9.25 9.8 -
Interim dividend for the year ended 31 December
2018 5.15 5.4 -
------------------------------------------------- ---------- ------ ------
Amount recognised as distributions to equity
holders in the year 15.2 13.7
Dividends settled in shares (1.5) (1.8)
------------------------------------------------- ---------- ------ ------
Dividends settled in cash 13.7 11.9
------------------------------------------------- ---------- ------ ------
7 Intangible assets
Customer Other acquired
Goodwill relationships intangibles Other intangibles Total
GBPm GBPm GBPm GBPm GBPm
--------------------- --------- --------------- --------------- ------------------ ------
Cost
At 1 January 2017 54.1 15.4 9.7 8.1 87.3
Additions - - - 0.3 0.3
--------------------- --------- --------------- --------------- ------------------ ------
At 31 December 2017 54.1 15.4 9.7 8.4 87.6
--------------------- --------- --------------- --------------- ------------------ ------
At 1 January 2018 54.1 15.4 9.7 8.4 87.6
Additions - - - 0.3 0.3
Disposals - - - (1.0) (1.0)
At 31 December 2018 54.1 15.4 9.7 7.7 86.9
--------------------- --------- --------------- --------------- ------------------ ------
Amortisation
At 1 January 2017 - 7.9 7.3 6.2 21.4
Charge in year - 2.3 0.9 0.5 3.7
--------------------- --------- --------------- --------------- ------------------ ------
At 31 December 2017 - 10.2 8.2 6.7 25.1
--------------------- --------- --------------- --------------- ------------------ ------
At 1 January 2018 - 10.2 8.2 6.7 25.1
Charge in year - 2.3 0.7 0.4 3.4
Disposals - - - (0.1) (0.1)
At 31 December 2018 - 12.5 8.9 7.0 28.4
--------------------- --------- --------------- --------------- ------------------ ------
Net book value
At 31 December 2018 54.1 2.9 0.8 0.7 58.5
--------------------- --------- --------------- --------------- ------------------ ------
At 31 December 2017 54.1 5.2 1.5 1.7 62.5
--------------------- --------- --------------- --------------- ------------------ ------
At 1 January 2017 54.1 7.5 2.4 1.9 65.9
--------------------- --------- --------------- --------------- ------------------ ------
8 Cash and cash equivalents
Cash and cash equivalents are analysed below, and include the
Group's share of cash held by joint operations of GBP84.5 million
(2017: GBP87.8 million).
2018 2017
GBPm GBPm
--------------------------------------------------- ------- -------
Cash and cash equivalents 189.3 248.7
Borrowings - current (10.0) (10.4)
Borrowings - non-current (60.5) (60.6)
--------------------------------------------------- ------- -------
Cash, cash equivalents and overdrafts in the cash
flow statement 118.8 177.7
--------------------------------------------------- ------- -------
9 Pensions
A defined benefit pension scheme is operated in the UK and a
number of defined contribution pension schemes are in place in the
UK and overseas. Contributions are paid by subsidiary undertakings
and, to the defined contribution schemes, by employees. The total
pension charge in the income statement was GBP20.8 million
comprising GBP20.4 million included in operating costs plus GBP0.4
million included in net finance expense (2017: GBP12.9 million,
comprising GBP11.1 million in operating costs plus GBP1.8 million
in net finance expense).
Defined benefit scheme
The defined benefit scheme was closed to new members on 31 May
2005 and from 01 April 2006 future benefits were calculated on a
Career Average Revalued Earnings basis. The scheme was closed to
future accrual of benefits to members on 30 September 2009. A full
actuarial valuation of the scheme was carried out as at 31 March
2016 and this was updated to 31 December 2018 by a qualified
independent actuary. At 31 December 2018, there were 2,858 retirees
and 2,962 deferred members. The weighted average duration of the
obligations is 16.6 years.
2018 2017 2016
GBPm GBPm GBPm
---------------------------------------------- -------- -------- --------
Present value of defined benefit obligations (752.7) (803.4) (827.5)
Fair value of scheme assets 748.5 779.5 754.0
---------------------------------------------- -------- -------- --------
Recognised liability for defined benefit
obligations (4.2) (23.9) (73.5)
---------------------------------------------- -------- -------- --------
Movements in present value of defined benefit obligations
2018 2017
GBPm GBPm
--------------------------------------------- ------- -------
At 1 January 803.4 827.5
Past service cost - GMP equalisation charge 8.6 -
Interest cost 19.6 21.9
Remeasurements - demographic assumptions (25.9) 16.8
Remeasurements - financial assumptions (20.7) 6.9
Remeasurements - experience adjustments 3.9 (34.5)
Benefits paid (36.2) (35.2)
--------------------------------------------- ------- -------
At 31 December 752.7 803.4
--------------------------------------------- ------- -------
Movements in fair value of scheme assets
2018 2017
GBPm GBPm
----------------------------------- ------- -------
At 1 January 779.5 754.0
Interest income 19.2 20.1
Remeasurements - return on assets (29.4) 28.4
Contributions by employer 15.7 12.5
Administrative expenses (0.3) (0.3)
Benefits paid (36.2) (35.2)
----------------------------------- ------- -------
At 31 December 748.5 779.5
----------------------------------- ------- -------
Expense recognised in the income statement
2018 2017
GBPm GBPm
----------------------------------------------------- ------- ------
Administrative expenses paid by the pension scheme (0.3) (0.3)
Administrative expenses paid directly by the Group (1.7) (1.9)
GMP equalisation charge (8.6) -
Interest cost on the net liabilities of the defined
benefit pension scheme (0.4) (1.8)
----------------------------------------------------- ------- ------
(11.0) (4.0)
----------------------------------------------------- ------- ------
The GMP (Guaranteed Minimum Pension) equalisation charge results
from a decision on 26 October 2018 when the High Court issued a
judgement involving Lloyds Banking Group defined benefit pension
schemes. The judgement concluded that the schemes should be amended
to equalise pension benefits for men and women in relation to GMP
benefits and has implications for the majority of defined benefit
schemes with liabilities before 1997. The effect of GMP
equalisation, which has been recorded as a past service cost, is an
increase of GBP8.6 million on the reported pension liabilities.
Fair value of scheme assets
2018 2017
GBPm GBPm
-------------------------- ------ ------
UK equities - 128.5
Overseas equities 80.7 104.2
Global equities 52.4 -
Multi-asset growth funds 140.7 -
Multi-credit fund 90.8 90.7
LDI plus collateral 276.6 -
Index linked gilts - 319.4
PFI Investments 51.6 52.2
Property 21.2 22.1
Absolute return fund - 52.8
Cash 34.5 9.6
-------------------------- ------ ------
748.5 779.5
-------------------------- ------ ------
Principal actuarial assumption (expressed as weighted
averages)
2018 2017
% %
-------------------------- ----- -----
Discount rate 2.80 2.50
Future pension increases 3.00 2.90
Inflation assumption 3.20 3.10
-------------------------- ----- -----
Weighted average life expectancy from age 65 as per mortality
tables used to determine benefits at 31 December 2018 and 31
December 2017 is:
2018 2017
Male Female Male Female
(years) (years) (years) (years)
-------------------------------- -------- -------- -------- --------
Currently aged 65 22.4 24.3 22.8 24.8
Non-retirees currently aged 45 23.8 25.9 24.5 26.7
-------------------------------- -------- -------- -------- --------
The discount rate, inflation and pension increase and mortality
assumptions have a significant effect on the amounts reported.
Changes in these assumptions would have the following effects on
the defined benefit scheme:
Pension Pension
liability cost
GBPm GBPm
----------------------------------------------------------- ----------- --------
Increase discount rate by 0.25%, decreases pension
liability and reduces pension cost by 30.3 0.8
Decrease inflation, pension increases by 0.25%, decreases
pension liability and reduces pension cost by 26.3 0.7
Increase life expectancy by one year, increases pension
liability and increases pension cost by 27.8 0.8
----------------------------------------------------------- ----------- --------
In accordance with the pension regulations, a triennial actuarial
review of the Costain defined benefit pension scheme was carried
out as at 31 March 2016. In February 2017, the valuation and an updated
deficit recovery plan were agreed with the scheme Trustee resulting
in cash contributions of GBP10.0 million for the 12 months to 31
March 2017 and then GBP9.6 million per annum (increasing annually
with inflation) until the deficit is cleared, which would be in 2031
on the basis of the assumptions made in the valuation and agreed
recovery plan.
In addition, as previously implemented, the Group will continue to
make an additional contribution so that the total deficit contributions
match the total dividend amount paid by the Company each year. Any
additional payments in this regard would have the effect of reducing
the recovery period in the agreed plan. The Group will also pay the
expenses of administration in the next financial year.
Any surplus of deficit contributions to The Costain Pension Scheme
would be recoverable by way of a refund, as the Group has the unconditional
right to any surplus once all the obligations of the Scheme have
been settled. Accordingly, the Group does not expect to have to make
provision for these additional contributions arising from this agreement
in future accounts.
Defined contribution schemes
Several defined contribution pensions are operated. The total expense
relating to these plans was GBP9.8 million (2017: GBP8.9 million).
10 Related party transactions
The Group has related party relationships with its major
shareholders, subsidiaries, joint ventures and associates and joint
operations, in relation to the sales of construction services and
materials and the provision of staff and with The Costain Pension
Scheme. The total value of these services in 2018 was GBP255.3
million (2017: GBP211.0 million) and transactions with The Costain
Pension Scheme are included in Note 9.
11 Impact of new accounting standards and change in accounting
policy
a) IFRS 9 'Financial Instruments' - impact of adoption
IFRS 9 replaces the provisions of IAS 39 that relate to the
recognition, classification and measurement of financial assets and
financial liabilities, derecognition of financial instruments,
impairment of financial assets and hedge accounting.
The adoption of IFRS 9 from 1 January 2018 did not result in
adjustments to the amounts recognised in the consolidated financial
statements. Financial assets are held by the Group predominantly in
order to collect the contractual cash flows. There is no material
impact of adopting an expected credit loss model for impairment of
financial assets. Hedge transactions undertaken by the Group meet
the requirements of IFRS 9 and are not impacted by adopting the new
standard.
b) IFRS 15 'Revenue from Contracts with Customers' - impact of
adoption
The Group has adopted IFRS 15 'Revenue from Contracts with
Customers' from 1 January 2018, which resulted in some changes in
accounting policies and adjustments to the amounts recognised in
the financial statements. In accordance with the transition
provisions in IFRS 15, the Group has adopted the modified
retrospective approach and has restated the brought forward
reserves as at 1 January 2018.
Under IFRS 15, revenue recognition is based on the satisfaction
of individual performance obligations and where these obligations
are satisfied over time revenue is based on the cost profile of
each obligation rather than in line with the total contract costs
profile. The main change resulting from adopting IFRS 15 is the
separation of individual, distinct performance obligations within
framework and multiple revenue stream type contracts. This change
results in a reduction in revenue recognised in periods prior to 1
January 2018 and a corresponding decrease in the amounts
recoverable on contracts in the statement of financial position of
GBP5.7 million and a decrease in opening retained earnings as at 1
January 2018 of GBP4.6 million, net of current tax. It will reverse
over the remaining periods of the contracts. During the year, the
Group recognised additional revenue and operating profit of GBP2.3
million (GBP1.9 million net of tax) as a result of adopting IFRS
15.
There is no impact on the commercial activities, lifetime
profitability or cash flows of the Group, as a result of the
adoption of this accounting standard.
c) Research and development expenditure credits (RDEC)
The Group has changed its accounting policy for research and
development expenditure credits for 2018 because these credits have
characteristics similar to government grants and it is considered
more appropriate to offset the income against the relevant
expenditure rather than reflect them in the tax charge.
The Group has changed its process for collating this data during
the year and this has enabled collection of more current data
rather than the lag previously experienced. This will reduce the
size of balancing adjustments in respect of prior period grants
included in the current year. As a consequence, as part of the
policy change the Group has included the prior year amounts in
other items.
In the statement of financial position, grants receivable are
now included in other debtors and not as a reduction to tax payable
and in the cash flow, in cash from operations not tax paid.
12 Forward-looking statements
The announcement contains certain forward-looking statements.
The forward-looking statements are not intended to be guarantees of
future performance but are based on current views and assumptions
and involve known and unknown risks, uncertainties and other
factors that may cause actual results to differ from any future
results or developments expressed or implied from the
forward-looking statements.
13 Responsibility statements
The responsibility statement set out below has been prepared in
connection with (and will be set out in) the Annual Report and
Accounts for the year ended 31 December 2018.
"Each of the Directors of the Company confirms that, to the best
of his or her knowledge:
-- The Group accounts, which have been prepared in accordance with
International Financial Reporting Standards as adopted by the
European Union, give a true and fair view of the assets, liabilities,
financial position and profits/losses of the Company (and of
the Group taken as a whole); and
-- The Strategic Report includes a fair review of the development
and performance of the business and the position of the Company
(and of the Group taken as a whole), together with a description
of the principal risks and uncertainties that they face."
The directors of the Company are Paul Golby (Non-Executive
Chairman), Andrew Wyllie (Chief Executive), Tony Bickerstaff (Chief
Financial Officer), Jane Lodge (Independent Non-Executive
Director), Alison Wood (Independent Non-Executive Director), David
McManus (Independent Non-Executive Director) and Jacqueline de
Rojas (Independent Non-Executive Director).
On behalf of the Board:
PAUL GOLBY
Chairman
ANDREW WYLLIE
Chief Executive
519653503
This information is provided by RNS, the news service of the
London Stock Exchange. RNS is approved by the Financial Conduct
Authority to act as a Primary Information Provider in the United
Kingdom. Terms and conditions relating to the use and distribution
of this information may apply. For further information, please
contact rns@lseg.com or visit www.rns.com.
END
FR JAMPTMBAMBIL
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March 06, 2019 02:02 ET (07:02 GMT)
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