RNS Number:2036J
Costain Group PLC
26 March 2003
COSTAIN GROUP PLC
Preliminary results for the year ended 31 December 2002
Costain, the international engineering and construction group, announces the
first set of full-year results (year ended 31 December 2002) since the
introduction of a new strategy to restore the Group's trading performance.
FINANCIAL HIGHLIGHTS
* Group turnover up 17%: #543.4m (2001: #462.9m)
* Profit before tax up 30%: #11.3m (2001: #8.7m)
* Earnings per share up 12%: 2.8p (2001: 2.5p)
* Net cash balances increased to #71.3m
* Return to UK profitability
OPERATIONAL HIGHLIGHTS
* Strategic targets being met
- Key management appointments
- Management systems and controls strengthened
- Business "de-risked": 85% of forward order book consisting of
partnering / framework contracts
- Asset management / contracting proportion ahead of target
* Contract successes in all sectors
- A 303 Stonehenge early contractor involvement
- CTRL - significant progress on Channel Tunnel Rail
infrastructure
- Negotiations proceeding on AMP 4 following success in AMP 3
- Successful implementation of ProCure 21 pilot for NHS
- Spanish development business gains planning approval
Commenting on the announcement, Stuart Doughty, Chief Executive of Costain Group
PLC said:
"The strong performance seen in the first half has continued through the year.
These are excellent results and reflect the successful implementation of our
growth strategy which is based on delivering added value to the customer.
Costain has regained its position as a major force in construction and
contracting and I look forward to reporting on our continuing success."
26th March 2003
ENQUIRIES:
Costain Group PLC Tel: 020 7705 8444
Stuart Doughty, Chief Executive
Charles McCole, Finance Director
Graham Read, Public Relations
College Hill Tel: 020 7457 2020
Mark Garraway
Matthew Gregorowski
COSTAIN GROUP PLC
Preliminary results for the year ended 31 December 2002
Chairman's Statement
Overview
I am pleased to report that our new strategy has brought clarity to the Costain
business. We are now using tough benchmark targets against which we measure our
delivery and I am delighted to report that, on every level, we are significantly
better than plan. The dual achievements of 2002 were recovery of the Group's
trading performance and the re-establishment of its reputation as a major name
in the industry.
For many decades the infrastructure of the UK, which is essential for our
continuing social and economic success, has been underfunded. This fact has at
last been recognised by the Government who are setting tough targets for major
improvements in the Health Sector, Schools, Roads, Railways, Water and the
Environment.
Despite the current economic downturn the Government remains committed to
driving forward a programme of improvements. It is actively seeking to work with
the private sector in those areas where it can be demonstrated that the Industry
can offer expertise and value for money in delivering its objectives. Costain is
very well positioned to assist in this major task.
Results and Finance
The Group made a profit on ordinary activities before taxation of #11.3 million
(2001: #8.7m) which is a 30% increase on last year's profit.
The Group turnover of # 543.4 million (2001: #462.9m) is up by 17% on the
previous year.
Earnings per share were 2.8p (2001:2.5p) which again is an increase of 12% on
last year.
No dividend has been recommended for payment whilst the Group rebuilds its
financial resource. This matter is being kept under review.
The Group has no significant borrowings and net cash balances at the end of the
year total #71.3 million (2001: #67.8m), including the Group's share of cash
held by joint arrangements (construction joint ventures) of # 27.6 million
(2001: #38.0m). This represented a cash inflow during the year of #3.5 million
(2001: #25.1m inflow) which was ahead of forecast.
Strategy
Following a comprehensive review of the Group's businesses a year ago, we began
the task of implementing a new strategy for growth. The success of turning the
strategy into reality is measured against the benchmark targets, which have been
put in place. These targets include growth in turnover for the Group of 15% per
annum coupled with a continuous improvement in profitability to 3% PBT for our
Group operations over the five years of the plan. We are ahead of our targets.
Our strategy and the resulting success have also been recognised by the London
Stock Exchange. In 2002, the Costain share price increased by 83 % from 13.25p
to 24.25p in a twelve-month period. This was at a faster growing rate than any
other publicly quoted UK construction company. Whilst we are not complacent I
believe this demonstrates that we have acquired a new following and fresh belief
in the Company's ability to succeed
In a number of areas our position is strong. We have 15% of the water utilities
capital programme with the amount of work in that sector increasing rapidly. We
are at the forefront of the UK Government's move to improve health and
transport. We have linked successfully with our major shareholder Kharafi
overseas, we have produced several outstanding operational performances during
2002 to confirm our status as a high-quality contractor and, most importantly,
we have substantially de-risked the business. Our joint venture with Banesto
Bank at Alcaidesa in Spain has made very significant progress during the year.
With the Group performing well, the Board has been able to spend some time
looking at a range of options beyond the immediate priorities which of course
remain our primary focus. It is clear that Costain has regained a leading
position in the construction and contracting sector and now has the potential to
take advantage of the current market opportunities. Accordingly, we are
examining our financial structure and also future opportunities to expand into
additional related activities where we can exploit our core competencies.
Board and Corporate Governance
The Board is delighted to report that although our Chief Executive, Mr Stuart
Doughty, attains the age of 60 years in September 2003, the normal retiring age
for executive directors, he has agreed to continue as Chief Executive to ensure
the delivery of the targets which he helped to set for the Company.
In 2002, Charles McCole was appointed to the Board as Finance Director and John
Bryant and Abdul Wahid Omar joined the Board as non-executive directors. Mr Omar
was appointed Deputy Chairman on 22 March 2002, I reported this in last year's
Annual Report as all three Board members joined the Company early in the year.
Save for that, the Board remained stable in 2002 and the only departure was
Basil Vasiliou who resigned as a non-executive director on 24 May 2002. The
Company is indebted to Mr Vasiliou for his help and guidance during his time
with the Company.
As you will probably be aware two reports have recently been published which
broadly fall under the banner of Corporate Governance.
First the "Review of the role and effectiveness of non-executive directors" by
Derek Higgs published in January 2003 (the "Higgs report") and secondly the
report by the committee set up by the Financial Reporting Council under the
chairmanship of Sir Robert Smith which looked at audit committees (the "Smith
report") which was published on 20 January 2003.
I am pleased to say the Company already complies with many of the
recommendations of the Smith report. Some of the recommendations of the Higgs
report have proved controversial particularly the proposal to enhance the role
of the senior independent non-executive director which many look upon as being
potentially divisive and damaging to board unity. This Company does not appoint
a senior independent non-executive director for the reasons set out in the
Report of the Directors. The Company already follows some of the other
recommendations in the Higgs report but upon the adoption of these reports into
the Combined Code we will, as a Company, review the amendments and make such
adjustments as the Board considers appropriate.
Share Incentive Schemes
You will recollect that at the Annual General Meeting last year the members of
the Company approved the adoption of a Save As You Earn Share Option Scheme (the
"Scheme") and a Long Term Incentive Plan (the " Plan"). All employees are
entitled to participate in the Scheme so long as they have been employed by the
Company for twelve months at the time the invitation is issued. A total of 1256
employees were entitled to participate in the Scheme. The take up by employees
was higher than is usually the case with 494 employees expressing the wish to
take part in the Scheme which represents some 39.33% of those invited to
participate. The average saving of each employee is #106.00 per month which I
understand is double the usual saving for this type of scheme. Total number of
shares, subject to the option is 13,420,225 ordinary shares which is equivalent
to 3.98% of the current issued share capital of the Company. We are delighted
with the confidence that the employees have shown in the Company.
The Plan was designed as an incentive and reward to executive directors and
senior management for meeting the objectives of the Group's business plan and
thus enhancing profitability. It also aligns the interest of the executive
directors and senior management with those of shareholders. There are twelve
participants in the Plan and the number of shares subject to an option under the
Plan is 2,047,833 which is equivalent to 0.607% of the current issued share
capital of the Company. Details of the performance target is set out in the
Directors' Remuneration Report.
Staff
During 2002 the decision was taken to move the headquarters of those divisions
within Costain Limited which were not based in Maidenhead into the Maidenhead
office. The intention was to create greater cohesion between the various
divisions of Costain Limited and with Costain International Limited and to
achieve economies and improve the efficiency within the business. I am pleased
to say that the move has been successfully completed and is bedding down well.
The financial results that the Company has achieved is entirely down to the hard
work, competence and commitment of the Costain staff and on behalf of the Board
I would like express our thanks for the great effort that they have made on
behalf of the Company.
Outlook
We are encouraged that central Government is now delivering on its commitment to
investing in major improvements in the Transport, Ministry of Defence and
Healthcare sectors in all of which the Group has significant involvement.
Despite the downturn in commercial and industrial sectors, Government
expenditure levels are now way above the high of 1992 with construction output
running in excess of 7% of GDP.
It would be inappropriate not to recognise the current economic climate,
however, I remain convinced that the need to improve UK infrastructure is so
pressing that programmes will continue as originally planned.
David G Jefferies
Chairman
25 March 2003
COSTAIN GROUP PLC
Preliminary results for the year ended 31 December 2002
Chief Executive's Review
Introduction
The Group took decisive steps in 2002 to reinforce and further implement the
Costain strategy, which for the past 18 months has provided the platform and
direction for future growth. The results showing improvements of c.25% in
profit and turnover whilst sustaining the same high level of cash, has given us
the opportunity to look at the Group's longer-term strategic direction and I
deal with this in more detail below. First, a look at the environment in which
we are operating and the exciting opportunities we believe it affords to the
Group going forward.
2002: A year of achievement
The UK construction industry has a total annual turnover of #65 billion. It
comprises a large variety of work in terms of size and nature, ranging from
small local challenges through to massive national infrastructure schemes which
impact on a nation's shape. Whilst the opportunities are numerous, speed of
delivery is becoming an increasingly important issue in the Government's
procurement process with a far more mature approach being adopted in looking for
best out turn value rather than lowest tender cost. A disciplined approach to
service delivery rather than contractual protection is at the heart of the new
philosophy and we have taken great care to position ourselves at the forefront
of this market.
In 2002, there was considerable activity in a variety of sectors particularly in
healthcare, with the advent of ProCure 21 and in transport infrastructure with
the introduction of 'early contractor involvement'. The temptation to pursue
many different types of projects on a lump sum fixed price basis was indeed
great. However, at Costain, we had clearly stated in the strategy that we would
identify and focus on certain sectors and only work for enlightened clients who
understood the benefits of partnering type arrangements.
We have not veered from this policy. High-risk fixed price contracts have been
avoided or rejected. The industry has experienced the pain of these projects and
this Company will no longer embark on such potentially damaging ventures to both
the client and the contractor. This is encouraging a closer relationship with
all parties to any contract - the designers, the subcontractors and the service
providers - producing a cohesive approach with a single point of service to the
ultimate user. This philosophy has become pivotal in turning Costain around. We
are still, however, principally a contractor and will maintain our focus on the
utilisation of core skills and avoid the dilution of that focus by moving into
other peripheral sectors which fall within the market, eg rail maintenance and
facilities management.
Transport and healthcare, coupled with the utilities market and the provision of
good quality service, have been very much the recent focus of Government
attention. In particular, they have allocated considerable funds, in excess of
#2 billion per year in each sector, to the delivery of better quality roads and
hospitals over the next two years.
In transport overall the Government is committed to a spending budget of more
than #180 billion over a ten-year period funded from a combination of public and
private investment. This includes more than #22 billion on strategic roads. At
present the road building programme has been slow to progress but in the last
year we have witnessed an increase in pace and we have tendered for a number of
projects.
This Company is one of the UK's major road-building contractors. Our
relationship with the Highways Agency (HA) is strong and it has been one of the
first Government agencies to utilise early contractor involvement where the
successful contractors are engaged early in the process of the initial design
and planning of the scheme. This ensures all parties are committed to the same
end result with commencement on site starting over a year in advance of the more
traditional route. The first of such schemes is the A303 Stonehenge, which we
have been awarded in joint venture.
The HA is one of those enlightened clients which has gained a reputation for
working in partnership and in 2002 we formed a highly successful combination to
prepare the A43 in time for the British Grand Prix. Both Costain, its joint
venture partner and the HA received Government praise and I am confident that
the A43 will act as an example of how, with a conscious attempt being made to
resolve outstanding issues in an expeditious way and maintaining an excellent
relationship with all effected parties, we can deliver a scheme of such
magnitude in a considerably shorter time than was originally considered
possible.
In the Railway sector the Government is also committed to a very aggressive
expenditure profile in both maintenance and capital works. We have decided
against any involvement on maintenance due to the high entry costs and reducing
margins. However, we are currently involved in carrying out capital work of some
#700 million in joint venture on the Channel Tunnel Rail Link and Kings Cross
Station Development. Due to the scope and complexity of the projects, coupled
with the need to achieve tight delivery schedules, we have adopted a partnering
style of approach and are successfully tackling the inevitable problems of
dealing with such complex schemes in high-density populated areas combining the
extremes of civil engineering skills with a sympathy for listed building
restoration work.
The Government's pledge to improve the nation's health service has been well
documented. The Capital Spending review in 2002 indicated capital investment in
the health sector is set to rise from #2.3 billion in 2002/03 to #4.2 billion in
2005/06 and to over #6 billion in 2007/08. The Government has committed itself
to delivering 7,000 new beds, 500 one-stop primary care centres, 3,000
modernised GP practices and 100 new hospitals by 2010.
This strategy has already had a major impact on the industry in terms of
procurement and delivery. Costain is well placed to take advantage of these
opportunities and was successful in being one of the contractors to be appointed
to carry out new hospital work in the North West and the Midlands under the NHS
ProCure 21 initiative.
I have stated that, in addition to the right markets and clients, we must have
the right Costain people. We have already concentrated our considerable
expertise to focus on transport and infrastructure and are recognised as one of
the leading road contractors both in the UK and overseas. However, in
healthcare, whilst we possessed the building skills, we were not so well
equipped with staff able to manage the interface between ourselves and the end
user. The recruitment of people in this area has been crucial to the development
of the Company.
Consequently, we appointed Jean Wright as Healthcare Director, a position unique
in the UK construction industry. Before joining Costain, Jean had spent her
working life with the NHS and is now advising both our PFI and Building teams in
forming new relationships with Health Trusts around the country which will be
very valuable to us in the future.
We have continued to strengthen our resource in other key areas as part of an
on-going recruitment campaign. Moreover, we have also invested in systems and
training. Indeed over the next three years we will be investing up to #3 million
in the IT infrastructure needed to achieve consistent best practice throughout
the whole business.
We have focused on six major disciplines including supply chain management and
risk management, each sponsored by a member of the Executive Board. We have
produced a supply chain management strategy, which reduces the number of Costain
suppliers and sub-contractors and focuses on building relationships, leading to
much better quality products and service on site and reduced costs.
Adhering to the Costain strategy requires, and will continue to take, constant
supervision and stringent management discipline. We have identified the markets,
the clients and their needs. We have, through training, systems and recruitment,
the right people in place to meet those needs and become an integral part of the
client's operation and not a separate entity offering a detached service. The
process is working. We have clarity not confusion and the opportunities for the
future are wide-ranging and exciting.
Current Trading and Prospects
The UK construction industry is experiencing a considerable increase in
activity. Costain will pursue only those contracts where our particular skills
can be profitably utilised to the full. Our experience and expertise have been
recognised worldwide and we have been awarded a number of prestigious projects
both in the UK and overseas.
We have recently been awarded the #38.5 million design and build contract to
improve the A34 Chieveley/M4 Junction 13. The scheme will include a new 3km A34
dual carriageway, which will pass under the M4. In addition, we have been
awarded a #10 million contract for the reconstruction of the M4 between
junctions five and seven.
In our Building division we have been named the preferred bidder for the
construction of the Diamond Synchrotron Light Source (#70m) - the largest
scientific facility to be built in the UK for 30 years. The facility, to be
built near Didcot in Oxfordshire, will produce pinpoint ultraviolet and X-ray
beams of exceptional brightness. These highly focused light beams will enable
scientists and engineers to probe deep into the basic structure of matter and
materials answering fundamental questions about everything from the building
blocks of life to the origin of our planet. It is a prestigious project and will
provide an opportunity to highlight our building skills to the nation..
Overseas, the company owns over 2,000 acres of development land at Alcaidesa,
Spain (twenty minutes to the east of Gibraltar and adjacent to Sotogrande) in a
joint venture with Banesto Bank on which we will be building a very prestigious
development over the course of the next ten years. We have focused on building
the infrastructure during the last year and working closely with the local
planning authorities and in the latter part of the year secured approval to
carry out the first major tranche of development including 1,780 homes, three
hotels and a further golf course. The programme of cautious development by
either conditional sale, development by others or development of the site using
our own resources, will now proceed over the next few years.
Also in International, we continue to benefit from our relationship with Costain
major shareholder Kharafi, with the award of the Palapye Sanitation project in
Botswana and a number of other projects being discussed in Botswana and the
Middle East. Due to the strength of the brand and our recognised past
experience we are being invited to join many joint ventures involved in major
infrastructure schemes in Africa, the Middle East and the Far East.
I make no apology for my continual reference to focusing on the right sectors,
clients and contracts. A perfect example of a contract, recently won, which fits
all those criteria is the #28m extension of the Port of Felixstowe's Trinity
Terminal for Hutchison Port Holdings. We have worked with the client
successfully on a number of projects over many years. It is a long-term
relationship based on unity not conflict with all parties committed to one goal.
We have recently, also with Hutchison, embarked on Phase II at the Freeport
Container Port in the Bahamas.
The NHS is pursuing similar relationships with contractors and the health
sector, as already stated, will be a major market for construction companies. We
have in recent times secured good contracts in several parts of the country and
progress will be maintained in both traditional and PFI healthcare sectors.
Another recent step forward for the Company was the award of a contract by the
Government to refurbish a number of Job Centres. This was of significant value
because it involved the South East region, an area where we are keen to expand
with the right type of clients - such as the Department of Work and Pensions and
the Department of Social Security.
There are a number of other major opportunities that we are currently pursuing
and I am pleased that we have maintained steady progress in all our endeavours.
The results reflect a return to profitability in the UK whist maintaining a high
level of cash generation derived from a lower risk and more sustainable
workload. This is entirely compatible with the Company strategy and we have not
sacrificed overall direction for the sake of high-risk projects, which might add
to the turnover in the short-term but may incur substantial financial penalties
at a later date.
Health, Safety and Environment
Whilst conscious that our overall processes were in order regarding the
necessary procedures, to further improve buy-in from all our site operatives we
initiated a campaign - BE SAFE - which was launched following detailed
consultations with our site teams and those of our sub-contractors. The aim was
to change the philosophy of safety into a cultural issue and always keep the
issue of safety in the minds of our operatives on site. We asked for suggestions
from operatives on how the profile of safety could be further raised. As a
result, many of the comments have now been incorporated into our procedures.
Other improvements include placing a greater emphasis on promoting control of
health related issues.
However, despite achieving progress it was with deep regret that we had to
record the death of Mr Altun, a welder working on a joint venture between
Norwest Holst and Costain. This tragic event reinforces the commitment of both
Costain Group Main and Executive Boards to maintaining a strict policy on health
and safety. As part of that policy we have recruited four more Health and Safety
graduates. This is in addition to our continuing commitment for a fully trained
workforce.
Operational Review:
Asset Management
We actively pursued the Asset Management market, particularly the capital
programme for major infrastructure providers. As the relationships mature with
Wessex, Southern, Thames, United Utilities and Yorkshire Water, we are now
working even more closely to set targets for the next round of the capital
programme - AMP4. More importantly, the relationships are such that we are now
looking at other opportunities working on a joint venture basis with these
clients.
We are now close to achieving 40% of overall turnover on contracts adopting
framework mechanisms as the basis of procurement. As the pressure builds up to
complete the AMP3 works to satisfy the regulatory requirements, so indeed the
volume of work being released is also increasing. Each contract varies in size
between #100,000 and #10 million and therefore our overall objective of having
50% of our business involved in Asset Management is well within our sights.
Building
The Building Division experienced major change in 2002 with Mark Gordon
appointed as Managing Director and new Regional Directors for London, Midlands
and Southern. One of the priorities in the Division was to blend this new
capability with the existing and valued Costain Building personnel. This has
been accomplished. We also welcomed our Healthcare Director and a new Commercial
Director. Each of these individuals is clear on the aim of the Building
Division, which is to develop a portfolio of projects based on partnering
relationships with key clients. Particular care will be taken to ensure all new
contracts have an appropriate balance of risk to reward and we will continue to
reject work which does not meet that strict criteria.
Key successes in 2002 included being appointed as one of the five principal
supply chain partners on the NHS's ProCure 21 pilot project operating in the
North West and Midlands. Qualifying as one of the partners was extremely
encouraging and I am pleased to report that we now have secured the Ormskirk
Hospital (#12m) and others are under negotiation. We are progressing well with
the strengthening of our relationships with the NHS Trusts. In addition, we have
also secured work at St Bartholomew's Hospital in London (#8m) and been awarded
the contract (#13.5 million) to build a diagnostic and treatment centre and a
two-storey ward building at the Royal Shrewsbury Hospital in Shropshire. The
latter is particularly pleasing as it was the first contract won by our Midlands
office which opened in March 2002. It was exactly the start that we wanted for
the region and now places us in a strong position for more local work especially
in the health sector.
As part of our philosophy, we have continued to pursue Tesco and Waitrose where
we remain Term Contractor in the East for the former and have successfully built
a flagship store at Cheltenham for the latter which will act as a benchmark for
future developments in the sector.
Civil Engineering
Another chapter in Costain civil engineering excellence was completed when we
finished the A43 in time for the British Grand Prix. Our efforts were praised by
the Government and the success has resulted in another excellent addition to our
roads portfolio. The A2/M2 joint venture is proving equally impressive and in
summer 2002 the new 950-metre Medway viaduct was formally opened by the
Transport Minister, David Jamieson. We will complete the contract during 2003.
At Warrington, we completed the new M62 junction 8 which will give direct access
to the forthcoming Omega project - a 226-hectare mixed-use development proposal
that will include offices, production, technology and distribution space. It is
estimated that over the 25-year life of the development, Omega will bring 12,000
jobs to the region. The Costain construction work has played a major part in
bringing this development to life.
Generally the roads sector has been strengthened in recent times by a Government
pledge to spend #5.5 billion on a number of major national and local transport
measures to tackle congestion and improve safety and reliability. The A303,
which we have been awarded in joint venture, is one of the designated projects.
As a leading UK road-builder, we look forward to tendering for more of these
schemes and working with the Government in tackling the problems on our roads.
Railway work has increased in importance to Costain. Award of the fit-out work
for the Channel Tunnel Rail Link at St Pancras has produced #311 million of work
at the station and Network Rail's award in November of the relining of Strood &
Higham tunnels in Kent is an #18 million contract for a strategically targeted
client. The tunnel-boring machine for the CTRL contract (Stratford to Barking)
was launched in December and successfully mined under the Central Line tunnels.
At King's Cross, we have now been awarded all stages of the phase one
modernisation contract which is progressing satisfactorily.
On the Marine side, we have secured the new contract for Hutchison Port Holdings
to provide a #28m extension of the Port of Felixstowe's Trinity Terminal. I
should also, at this point, praise our Marine people for their work on the
Hungerford Millennium Bridge Project. The Bridge, in the heart of London on the
River Thames, opened in the autumn and consists of two symmetrical footbridges.
Costain, in joint venture, overcame a number of obstacles and produced what has
become one of London's most attractive new landmarks.
International
Our business in Southern Spain focused on Alcaidesa, is proving a tremendous
success. We hold a 50% interest in Alcaidesa Holding SA a residential and
leisure company. The first phase of the development scheme, as reported in
previous annual reports, has resulted in a good level of house and individual
building plot sales being completed and an on-going building programme of
housing projects has been agreed.
We now have all the required consents to Alcaidesa's Master Plan proposals to
take forward the second phase of the project. These consents, on a site of 186
hectares, permit the construction of three hotels, part of a proposed new
18-hole golf course with clubhouse facilities and approximately 1,780
residential units to be built in the Andalucian 'pueblo' style of development.
In consequence, the sale of one hotel site to a major Spanish hotel operator has
now been signed and the operator will build a 300-bed, low-rise four-star
facility on a site fronting the sea and the existing Alcaidesa links golf
course.
Alcaidesa will also continue to build quality housing in its own name, but
recognises the risk associated with large scale speculative schemes which are
subject to market change and the general economic health of the European target
market.
To dilute that risk and at the same time secure profits from development, a
joint venture has been formed with a major Spanish residential developer to
build 400 housing units over the next four years. The benefits of this venture
will accrue over the build-out period and assist in safeguarding Alcaidesa's
future profits and cash flow.
Master Plan proposals for phase three of the scheme are well advanced and it is
hoped that all necessary consents will be obtained during the course of the
year. The third phase of a 100-hectare enclave should permit the building of a
further 1,200 residential units with some commercial facilities and the
remainder of the new 18-hole golf course forming part of phase two. Longer-term
development proposals for a fourth phase on a 209-hectare site will be brought
forward over the next two years.
Europe aside, the Board has a plan for targeting clients and countries that are
familiar to Costain and selecting projects with commercially acceptable terms
and manageable risks. In particular, partnering relationships will be addressed
by working with one or more of three main Costain shareholders - Intria, Kharafi
and Raymond - as well as existing regional strategic partners such as China
Harbour Engineering in Hong Kong.
Projects successfully completed during the year included the new radio and TV
broadcasting complex in Botswana in joint venture with Kharafi, the KCRC Pat
Heung Rail Maintenance Centre in Hong Kong and the 70-kilometre Ngezi Road
project in Zimbabwe.
Projects under tender include the #500 million plus Stonecutters Bridge in Hong
Kong where we are seeking to bid in limited competition for what will be the
world's longest cable stayed bridge with our partners, China Harbour Engineering
and NKK of Japan. COGAP are preparing a tender for the #140m Das Island Fourth
Train project in JV with JGC. Three health sector tenders have been submitted
in joint venture with Kharafi in Botswana and a further two are under
preparation.
We have been awarded a drainage project in joint venture with Kharafi at Palapye
in Botswana, valued at approximately #20 million, and we also secured the
expansion of Victoria Falls Airport in Zimbabwe.
The political situation in Zimbabwe is uncertain and obviously we are closely
monitoring developments. However, our exposure is limited and, at present, our
construction activity progresses well. We must accept that all international
operations are subject to extreme change in terms of political landscape and we
will therefore take great care to ensure that all risks are understood and
appropriate measures are taken to avoid any impact on the company.
We continue to proceed with caution recognising the benefits of the association
with our major shareholders and joint venturing with partners of long-standing
and strong track records of success.
PFI
Our major #76 million PFI King's College Hospital project in London in joint
venture progressed extremely well during the year and the Golden Jubilee Wing
was completed ahead of schedule to the great satisfaction of the client. This
success enabled patients to move into the new facilities two months early. To
record such a quality performance is extremely pleasing for all concerned. This
is exactly the type of reference we need to produce for our healthcare
portfolio.
Looking to the future, we expect to be appointed Preferred Bidder (in
partnership) for Kingston Hospital and we are Preferred Bidder on two
intermediate Care Homes in Kent. We are making progress with several other PFI
Healthcare schemes, including two currently in the final competitive stage of
bidding.
We remain as a shareholder in Bridgend Custodial Services (Parc Prison,
Bridgend) and the Hospital Partnership Consortium (King's College Hospital).
Construction in joint venture of the new Met Office headquarters in Exeter is
progressing well and is ahead of schedule, much to the delight of the client.
The topping out ceremony to celebrate the completion of the structure was held
in December 2002.
Costain Oil, Gas & Process (COGAP)
In the early part of the year we further strengthened our management team and
introduced Bill Dube as Managing Director. The order intake for COGAP during
the year included the Major Plant Overhauls Term Contract for ADGAS by the Abu
Dhabi operation. COGAP has embarked on a business strategy of addressing
additional markets beyond the traditional oil and gas sectors through our proven
competencies in engineering, design, project management and procurement. We are
planning to leverage into further opportunities within the oil and gas sectors
as well as chemicals, water, consultancy and further shutdown/maintenance
contracts.
Construction was completed on two further NTS Compressor Stations at Cambridge
and Nether Kellett with successful 24-hour reliability runs. Commissioning has
commenced and final performance testing took place in March 2003.
COGAP successfully shipped the largest Nitrogen Rejection Unit of its kind to
the end client, Lasmo in Pakistan. Construction work is substantially complete
and COGAP personnel are now assisting the client with final commissioning. On
Das Island (Adgas), the gas facility off UAE with over 3,000 employees, we
successfully completed a six-week shutdown with an unblemished safety record and
an excellent financial result and have now negotiated a further three years of
maintenance work.
The #65 million River Field contract to engineer, procure, construct and project
manage for Burlington Resources is proceeding well. The project has an excellent
safety record with no incidents in more than a year of site work. Civils work is
being undertaken in-house and is on programme. The project is on course to
deliver gas on the original programme date of mid-December 2003.
Conclusion
All in all this has been a very successful year, particularly regarding the type
of work we have secured and our continuing success at leveraging the brand to
build a solid platform for future profitable growth.
Our strategy, the successful implementation of which has been reflected in
virtually a doubling of our share price over the year, is robust and
differentiates us from our competitors in that we are adhering to those sectors
with considerable growth potential in a focused way and strictly adhering to a
low-risk policy. I feel confident that focusing predominantly on contracting
and indigenous growth whilst also considering any new opportunities that present
themselves will hold us in very good stead for the future.
Stuart J Doughty
Chief Executive
25 March 2003
COSTAIN GROUP PLC
Preliminary results for the year ended 31 December 2002
Financial Review
Results
Profit before tax has improved by 30% to #11.3 million (2001: #8.7m) on a
turnover including joint arrangements (construction joint ventures) up 17% to
#543.4 million (2001: #462.9m).
Net interest receivable amounted to #1.4 million (2001: #2.0m) and other finance
income amounted to #1.9 million (2001: #4.5m).
The tax charge on profits of #1.8 million (2001 : #0.5m) is an effective rate of
16% and reflects the utilisation of Group tax losses.
Earnings per share increased 12% to 2.8p (2001: 2.5p).
Cash Flow and Borrowings
Despite the changing profile of the business towards framework/partnered
reimbursable contracts, the Group achieved a cash inflow during the year of #3.5
million (2001: #25.1m) that brought the net cash position to #71.3 million
(2001: #67.8m). The net position includes #0.5 million of overdrafts, which
will be repaid during the year leaving the Group with near to zero gearing.
Order Intake
Order intake improved significantly during the year with a work-in-hand position
of #703 million (2001: #570m) at the year end.
Awards since the year end and growth in existing contracts have increased the
work-in-hand position to a sum approaching #1 billion with at least 85% of the
order book being secured on a framework/partnered format, thus fully aligning
with Group Strategy.
Shareholder Funds
The Group has positive operating net assets of #3.0 million (2001: #5.2m
liabilities) for the first time in years. However, the impact of the deficit in
the pension scheme, which under FRS17 is included in the balance sheet produced
a negative shareholder fund position of #21.2 million (2001: #4.1m). The Group
adopted FRS17 in full in 2000 to give a fairer view of the pension position but
the volatility in the market has created significant fluctuations.
The value of assets of the pension scheme have fallen by 9.9% in the year to
December 2002 following negative returns on the equity markets. To stabilise the
pension liabilities we have increased contributions to the pension scheme from
both employee and employer and we intend to cap pensionable salary increases to
inflation.
Shareholder Return
The market price of the Group ordinary shares at the close of the financial year
was 24.25p reflecting an 83% increase for the year as against a 25 % fall
(source: Datastream) on the FTSE Allshare index over the same period.
Treasury
The Group holds financial instruments for two main purposes: to finance its
operations and to manage the interest rate and currency risks arising from its
operations and its sources of finance. Various financial instruments - for
example, trade debtors, trade creditors, accruals and prepayments - arise
directly from the Group's operations. The Group finances its operations through
a mixture of working capital and bank borrowings. With the Group's low level of
borrowings, the main exposure to interest rates fluctuations arises from the
surplus cash, which when available is generally deposited with one of the
Group's relationship banks.
The Group has borrowing facilities with its relationship banks to a maturity
date of 31 March 2004. In addition to its borrowing facilities, the Group also
enjoys contract bonding facilities with its relationship banks and St Paul
Surety Europe Limited, both of which facilities subsist until the 31 March 2004.
The Group has transactional currency exposure arising from commercial activities
overseas by subsidiaries in currencies other than the subsidiaries' operating
currencies. In such circumstances, the Group requires its subsidiaries to use
forward currency contracts to minimise the currency exposure unless a natural
hedge exists elsewhere within the Group.
Going Concern
The Directors believe, after due and careful enquiry, that the Group has
sufficient working capital for its present requirements and, therefore, consider
it appropriate to adopt the going concern basis in preparing the 2002 accounts.
COSTAIN GROUP PLC
Preliminary Results for the year ended 31 December 2002
CONSOLIDATED PROFIT AND LOSS ACCOUNT
Year ended 31 December 2002 2001
Notes
Continuing #m Continuing
#m
Turnover 1
Group undertakings and Group share of 543.4 462.9
joint ventures
Less: Group share of joint ventures (21.6) (5.8)
turnover
Group turnover 521.8 457.1
Cost of sales (504.8) (440.7)
Gross profit 17.0 16.4
Administration expenses (16.5) (16.1)
Operating profit from Group 0.5 0.3
undertakings
Share of joint ventures operating 7.5 1.9
results
Operating profit - Group and share of
joint ventures 8.0 2.2
Net interest receivable/(payable) and
similar income/(charges)
Group undertakings 2.0 2.5
Joint ventures (0.6) (0.5)
Other finance income - Group
undertakings 1.9 4.5
Profit on ordinary activities before
taxation 1 11.3 8.7
Taxation (1.8) (0.5)
Profit on ordinary activities after
taxation 9.5 8.2
Equity minority interests - 0.1
Profit for the financial year 9.5 8.3
Earnings per share - basic and 2 2.8p 2.5p
diluted
During the year and the previous year, no businesses were acquired and therefore
all continuing results arise from existing operations.
CONSOLIDATED CASH FLOW STATEMENT
Year ended 31 December Notes 2002 2001
#m #m #m #m
Net cash inflow from operating activities 4 3.9 19.4
Returns on investments and servicing of finance
Interest received 2.4 2.8
Interest paid (0.4) (0.3)
Net cash inflow from returns on
investments and servicing of finance 2.0 2.5
Taxation
Overseas tax paid (0.4) (0.2)
Capital expenditure and financial investment
Purchases of tangible fixed assets (1.2) (0.8)
Sales of tangible fixed assets 0.1 1.0
Repayments of loans to other investments 0.1 -
Loans to joint ventures (0.5) (0.4)
Repayment of loans to joint ventures - 3.1
Net cash (outflow)/inflow from capital expenditure
and financial investment (1.5) 2.9
Net cash inflow before financing 4.0 24.6
Financing
Loan repayments - (2.9)
Net cash outflow from financing - (2.9)
Increase in cash in the year 4.0 21.7
RECONCILIATION OF NET CASH FLOW TO MOVEMENT IN NET CASH
2002 2001
#m #m
Increase in cash in the year 4.0 21.7
Cash outflow from reduction in loan financing - 2.9
4.0 24.6
Currency realignment (0.5) 0.5
Movement in net cash 3.5 25.1
Net cash at 1 January 67.8 42.7
Net cash at 31 December 71.3 67.8
COSTAIN GROUP PLC
Preliminary Results for the year ended 31 December 2002
CONSOLIDATED BALANCE SHEET
As at 31 December 2002 2001
Notes #m #m
Fixed assets
Tangible assets 3.3 2.8
Investments 1.0 1.1
Investments in joint ventures
Share of gross assets 59.7 48.6
Share of gross liabilities (43.0) (40.9)
16.7 7.7
21.0 11.6
Current assets
Stocks 1.6 1.1
Debtors 109.7 95.6
Cash at bank, monies on deposit and in hand 71.8 69.1
183.1 165.8
Creditors: amounts falling due within one year
Bank overdrafts (0.5) (1.3)
Other creditors (189.8) (166.3)
(190.3) (167.6)
Net current assets/(liabilities)
Due within one year (11.5) (7.3)
Due after one year 4.3 5.5
(7.2) (1.8)
Total assets less current liabilities 13.8 9.8
Creditors: amounts falling due after more than one
year
Other creditors (0.9) (0.5)
Provisions for liabilities and charges (9.9) (14.5)
Net assets/(liabilities) excluding pension (liability) 3.0 (5.2)
/ asset
Pension (liability)/ asset (24.1) 9.5
Net (liabilities)/assets including pension (liability) (21.1) 4.3
/ asset
Share capital and reserves
Called up ordinary share capital 33.7 33.7
Share premium account 119.3 119.3
Profit and loss account (174.2) (148.9)
Equity shareholders' funds 3 (21.2) 4.1
Equity minority interests 0.1 0.2
(21.1) 4.3
COSTAIN GROUP PLC
Preliminary Results for the year ended 31 December 2002
NOTES TO THE ACCOUNTS
1 Business and geographical segment information
Business segment information
In the opinion of the directors, the administering of the engineering, construction and property development
projects are the only material classes of business.
Geographical segment Turnover Profit/(loss) Net assets/
information by origin (liabilities)
2002 2001 2002 2001 2002 2001
#m #m #m #m #m #m
Continuing operations
Group undertakings
United Kingdom 484.6 415.6 2.2 (1.5) (108.8) (68.8)
Rest of the world 37.2 41.5 (1.0) 2.5 (0.3) (2.4)
Reorganisation costs - UK (0.7) (0.7)
Turnover, operating profit and
net liabilities of Group
undertakings 521.8 457.1 0.5 0.3 (109.1) (71.2)
Joint ventures
United Kingdom 3.6 - - - 1.7 1.6
Rest of the world - property 17.9 5.5 7.5 1.9 16.4 7.5
development
Rest of the world - E & C 0.1 0.3 - - (1.4) (1.4)
543.4 462.9 8.0 2.2 (92.4) (63.5)
Net interest receivable/
(payable)
and similar income/(charges) 1.4 2.0
Other finance income 1.9 4.5
Net cash 71.3 67.8
Profit on ordinary activities
before taxation and net
(liabilities)/assets 11.3 8.7 (21.1) 4.3
Turnover by destination is not materially different to turnover by origin.
2 Earnings per share
The calculation of earnings per share is based on earnings of #9.5m (2001:
#8.3m) and 337,136,350 ordinary shares being the weighted average number of
ordinary shares in issue during the year.
Diluted earnings per share are the same as basic earnings per share.
3 Reconciliations of movements in shareholders' funds
2002 2001
#m #m
Profit for the financial year 9.5 8.3
Other recognised losses in the year (34.8) (29.6)
Net reduction in shareholders' funds (25.3) (21.3)
Shareholders' funds at 1 January 2002 4.1 25.4
Shareholders' funds at 31 December 2002 (21.2) 4.1
4 Notes to the cash flow statement
Reconciliation of operating profit to net cash inflow from operating
activities
2002 2001
#m #m
Operating profit 8.0 2.2
Depreciation 0.5 0.8
Amounts written back to investments (1.4) (2.9)
Joint ventures (7.5) (1.9)
(Increase)/decrease in stocks (0.5) 0.8
(Increase)/decrease in debtors (14.2) 3.0
Increase in creditors 23.6 20.4
Decrease in provisions (4.6) (3.0)
Net cash inflow from operating activities 3.9 19.4
The accounts and notes set out above do not constitute the Company's statutory
accounts for the years ended 31 December 2002 or 2001 but are derived from those
accounts. Statutory accounts for the 2001 have been delivered to the Registrar
of Companies and those for 2002 will be delivered in due course.
The auditors have reported on these accounts; their reports were unqualified and
did not contain a statement under section 237 (2) or (3) of the Companies Act
1985.
This information is provided by RNS
The company news service from the London Stock Exchange
END
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