REG - Costain Group PLC - Final Results <Origin Href="QuoteRef">COSG.L</Origin> - Part 2
01/03/2017 07:06
- Part 2: For the preceding part double click ID:nRSA1332Ya
significant protection from immediate change to Government policy.· Monitoring of policy development via industry
groups and close contact with customers in our target markets.· High levels of engagement with our customers and other key stakeholders in Government and third
parties.
3. Financial strengthCostain must establish sufficient financial strength to operate its business. Without this the Group will:· Be unable to demonstrate to customers the required level of financial resource resulting in failure to win long-term contracts. · Be unable to maintain a competitive scale in a consolidating market within the engineering sector.· Fail to maintain adequate working capital to operate the business. Costain prioritises its financial strength to ensure it can continue to win work:· Foreign currency exposure risk to be hedged.· Parent Company guarantee is the preferred option, and any performance bonds to be a maximum of 10% and surety bonds are preferred.· There is zero tolerance to fraud and bribery. · A strong balance sheet including positive net cash position.· Extensive unutilised banking and bonding facilities· The strategic use of joint venture
partners to help achieve the required financial and operational strength only in markets where this is not demonstrated by the Group in isolation.
4. Winning new workCostain maintains a pipeline of orders that now extends to £3.9 billion. There is a need for Costain to continue to innovate in order to win further work and maintain a leading position in the sector which could be at risk from: · Competition and failure to win work from core customers· Costain not being able to demonstrate the ability to provide an end-to-end delivery function as demanded by our customers Costain has no appetite for winning work that will impact the financial strength of the business:· Only sectors and customers which form part of the Group strategy to be pursued.· Target cost is the preferred contract form.· All contracts to be at least cash neutral.· Operations are to be in line with the Group Commercial Expectations document.· Opportunities should be pursued alone unless there is a compelling reason otherwise. · The order book at year end stands at £3.9 billion, providing long-term visibility of earnings. · A focus on blue-chip customers whose major spending plans are
underpinned by strategic national needs, regulation commitments or essential maintenance requirements by following the Group's unique 'Engineering Tomorrow' strategy.·
The accelerated implementation of programme management and technology services via strategic acquisitions.· Continuing to develop and maintain strong relationships
with customers across key markets on the back of our track record for delivery.· Regularly monitoring pipeline opportunities and ensuring resources are centrally
allocated to the most advantageous business development activities.· Continuously striving to broaden the skills and breadth of our capability (organically and by
acquisition) to meet the increasingly broad requirements of the market.· Continuing to develop the Group's market proposition through the introduction of new
technologies and the strong Costain brand.
5. Operational deliveryCostain delivers works through a number of often large contracts containing defined output requirements. There is a risk that Costain is unable to deliver these services to the time, cost or quality required in the contract as a result of:· A failure to accurately assess our works (including costs and time required) or contractual terms at tender.· Design faults that result in additional works to rectify.· An interruption to our supply chain that provides part of the services or materials to complete the works.· Refusal of claim by insurers following a loss· Compensation events or increase in scope not being fully reimbursed by our customers. All operations to follow the Costain Way. Only approved suppliers to be used. All legislation and regulations to be complied with at all times. · The Costain Way provides a comprehensive management system including policies, processes and procedures for all parts of the contract life-cycle; from tendering to
contract close-out. Operational controls are also reviewed.· The use of experienced and qualified staff to prepare bids and manage the contracted works· Defined
delegated authority levels for approving all tenders where all significant contracts are subject to escalation from the Executive Investment Committee to the Board.·
Extensive review of the supply chain strength prior to engagement and a requirement to use performance bonds where they are appropriate. · Regular contract leaders'
meetings are used to discuss safety, progress, quality, financial performance, end forecast, risk, etc.· Work on site is audited by in-house specialists and reports
are prepared so that corrective action, where required, can be taken.· A senior executive is responsible for overall quality issues, the updating of best practice
and ensuring compliance in both existing operations and in line with the changing business.· Enhanced controls regarding the administration of insurance claims and
the management of contracted design was developed in 2015 including the evolution of processes to minimise exposure to the customer, whilst preserving subrogation with
the Group's supply chain.· Compensation events are closely monitored by our project teams, and are included in the monthly reporting process through to senior
management. Robust processes are in place to ensure compliance with contractual requirements regarding such compensation events, including timely notification, documented
discussions with the customer, and maintenance of appropriate supporting records.
6. People and skillsThe success of the Group is built on the strength and experience of our people. Failure to continue to attract, retain and develop our best-in-class team in an increasingly competitive market may limit the Group's ability to grow the business as anticipated, or cause a short-term impact on performance The right skills and capabilities to carry out Group operations are essential. · The Group's remuneration policy is designed to attract and retain high-calibre individuals and to remunerate fairly, whilst not encouraging inappropriate business
risk to be taken· The Group has a high staff retention rate and engaged workforce. · Pay and conditions of employment are regularly reviewed against the
prevailing market and bench marked against competitors to ensure that the Group remains competitive at all levels.· An internal recruitment team provides a dedicated
service to the identification and enrolment of new staff who are provided with training as part of a comprehensive induction process· A well-developed succession
planning process is regularly monitored.· Talent reviews and ongoing personal development are proactively supported at all levels.· Active liaison with
employees is achieved through the Costain Ground Force employee committee and engagement surveys.·
7. Pension liabilitiesThe Group has a deficit of £73.5 million in its defined benefit pension scheme which was closed to new members from 01 June 2005 and to future accrual on 30 September 2009. Failure to manage the scheme so that the liabilities are within a range appropriate to its capital base could have an adverse impact on the Group's operational results All current and future pension arrangements to be on a defined contribution basis. · Regular reviews, including the use of independent professional advisers, are held to mitigate long-term risk associated with the legacy defined benefit scheme.·
Ongoing active management of the obligations of the scheme including the transfer of assets into the scheme and the implementation of Enhanced Transfer Value and
Pension Increase Exchange exercises.· An actuarial valuation of the scheme as at 31 March 2016 has been carried out and an associated deficit recovery plan has been
agreed with the Trustee.
8. AcquisitionsThe Group has a growth plan that is partly facilitated by the effective acquisition of companies that will enhance the achievement of its strategy. Failure to integrate successfully an acquired business or recognise and mitigate new and related risks could have a damaging impact on the Group's future revenue and profits Acquisitions must focus on the creation of shareholder value through capability-broadening opportunities that can be cross-sold via our existing customer base. · Full due diligence is carried out before any acquisition is made.· Integration plans are put in place and managed by a dedicated and experienced team.·
Regular progress reports using pre-agreed performance indicators are made to the Board.· Lessons are fed back into future integration exercises.
9. Failure of IT systemsCostain has a high reliance upon IT systems to operate efficiently, process transactions and report on results. The failure of a system as well as the failure to store key documentation securely could cause financial loss to the Group and expose the Group to breaches of legislation and fines. It may also have a negative effect on the ability to secure further contracts. This risk has increased due to increasing levels of cyber security threats within society All critical systems are to be regularly backed up and a disaster recovery contingency plan put in place. · Transition underway to cloud-based systems for enhanced security and monitoring.· There is at least duplication in core hosting systems supporting data
recovery efforts.· A suitably qualified team for support, including specialist outsourced suppliers, ensures knowledge is maintained.· Regular internal and
external testing and assurance exercises are carried out.· Established business continuity systems and procedures, routinely tested and developed, ensure rapid
recovery and data retrieval.· Security training is provided for safe usage and storage of documentation for all staff.· The system is accredited to the ISO
27001:2013 Information Security Management System providing independent assurance of best practice.
Going concern
The Group's business activities, together with the factors likely to affect
its future development, performance and position will be set out in the
Strategic Report of the Annual Report and Accounts for the year ended 31
December 2016. Principal risks and uncertainties are described in the
paragraphs above. In addition, Note 17 to the financial statements will
include the Group's objectives, policies and processes for managing its
exposures to interest rate risk, foreign currency risk, counterparty risk,
credit risk and liquidity risk. Details of the Group's financial instruments
and hedging activities will also be provided in Note 17.
The Directors believe, after due and careful enquiry, that the Group has
adequate resources to continue operations for the foreseeable future.
Accordingly, they continue to adopt the going concern basis in preparing the
accounts.
Viability statement
In accordance with provision C.2.2 of the 2014 UK Corporate Governance Code,
the Directors have assessed the viability of the Group over a three-year
period.
This assessment has been made taking into account the current position of the
Group, the annual corporate planning process and the potential impact of the
principal risks stated in the paragraphs above. The plans and projections
prepared as part of the corporate planning process consider the Group's cash
flows, profits, contracted work, dividends and other key financial indicators
over the period.
The principal risks have been taken into consideration in preparing the
projections, with particular emphasis on:
· A major health, safety or environmental incident;
· Reduction in new work won;
· Operational delivery issues;
· Deterioration in pension liabilities;
· Making an acquisition that does not achieve the planned profit;
· A major IT systems failure.
The projections have then been incorporated into a sensitivity analysis which
reflects plausible, but severe, combinations of the above variables, and the
impact of these on the Group's liquidity and banking arrangements. Given the
long-term nature of a significant element of the Company's activities, a
number of the principal risks potentially impact the Group's ability to win
new work. This has therefore formed a key element of the assessment.
The period of three years has been chosen because this is a time period in
which the Company has a reasonable visibility of secured work and pipeline of
opportunities. It is also the period reviewed by the Board in the business
planning process.
Based on this assessment, the Directors confirm that they have a reasonable
expectation that the Company will be able to continue in operation and meet
its liabilities as they fall due over the three-year period to 31 December
2019.
In making this statement, the Directors carried out a robust assessment of the
principal risks facing the Group, including those that would threaten its
business model, future performance, solvency or liquidity.
Costain Group PLC
Results for the year ended 31 December 2016
Consolidated income statement
Year ended 31 December 2016 2015
Notes Before Other items Total Before Other items Total
other items other items
£m £m £m £m £m £m
Continuing operations
Revenue 1,658.0 - 1,658.0 1,316.5 - 1,316.5
Less: Share of revenue of joint ventures and associates 8 (84.3) - (84.3) (52.9) - (52.9)
Group revenue 1,573.7 - 1,573.7 1,263.6 - 1,263.6
Cost of sales (1,497.7) - (1,497.7) (1,196.9) - (1,196.9)
Gross profit 76.0 - 76.0 66.7 - 66.7
Administrative expenses before other items (34.9) - (34.9) (33.5) - (33.5)
Amortisation of acquired intangible assets - (4.6) (4.6) - (3.2) (3.2)
Employment related and other deferred consideration - (1.6) (1.6) - (0.4) (0.4)
Group operating profit 41.1 (6.2) 34.9 33.2 (3.6) 29.6
Share of results of joint ventures and associates 8 0.2 - 0.2 (0.1) - (0.1)
Profit from operations 2 41.3 (6.2) 35.1 33.1 (3.6) 29.5
Finance income 3 0.6 - 0.6 0.8 - 0.8
Finance expense 3 (4.4) (0.4) (4.8) (4.0) (0.3) (4.3)
Net finance expense (3.8) (0.4) (4.2) (3.2) (0.3) (3.5)
Profit before tax 37.5 (6.6) 30.9 29.9 (3.9) 26.0
Taxation 4 (5.1) 0.6 (4.5) (4.4) 0.6 (3.8)
Profit for the year attributable to equity holders of the parent 32.4 (6.0) 26.4 25.5 (3.3) 22.2
Earnings per share
Basic 5 31.5p (5.8)p 25.7p 25.1p (3.3)p 21.8p
Diluted 5 30.7p (5.7)p 25.0p 24.4p (3.2)p 21.2p
The impact of business disposals in either year was not material and,
therefore, all results are classified as arising from continuing operations.
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