REG - Costain Group PLC - Results For The Year Ended 31 December 2022
14/03/2023 07:00
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RNS Number : 8189S Costain Group PLC 14 March 2023
14 MARCH 2023
COSTAIN GROUP PLC
("Costain", the "Group", or the "Company")
RESULTS FOR THE TWELVE MONTHS ENDED 31 DECEMBER 2022
Strong financial performance in 2022
· Reported and adjusted(1) revenue growth in 2022 across the Group, up
25.2% and 20.6% respectively year-on-year.
· Reported operating profit of £34.9m (FY21: £9.5m loss) and adjusted
operating profit(1) growth of 20.6% to £36.3m (FY21: £30.1m).
· Strong balance sheet:
o Free cash flow(2) of £72.9m (FY21: £53.1m) mainly reflecting positive
working capital.
o Net cash at year(3) end FY22 of £123.8m (FY21: £119.4m), ahead of market
expectations.
· High quality secured workload reflecting five-year programme cycles:
o Order book of £2.8bn (FY21: £3.4bn), and
o Preferred bidder book of £1.6bn (FY21: £0.9bn).
· Margin milestones - adjusted operating margin run-rate of 3.5% during
the course of FY24 and 4.5% during the course of FY25.
Financial summary
£m FY22 adjusted(1) FY22 adjustments(1) FY22 reported FY21 FY21 reported Adjusted(1) change
adjusted(1)
Revenue 1,421.4 - 1,421.4 1,178.6 1,135.2 20.6%
Operating profit 36.3 (1.4) 34.9 30.1 (9.5) 20.6%
Operating margin 2.6% (0.1)% 2.5% 2.6% (0.8)% -
Profit before tax 34.2 (1.4) 32.8 26.3 (13.3) 30.0%
Basic EPS 9.9p (0.5)p 9.4p 9.6p (2.1)p 3.1%
Dividend per share - - - - - -
Adjusted free cash flow(2) 72.9 53.1 37.3%
Net cash balance(3) 123.8 119.4
1. See notes 1 to 4 of the financial statements for adjusted metric details
and definitions, and reconciliation to reported metrics.
2. Free cash flow is defined as cash from operations, excluding adjusting
items and pension deficit contributions, less taxation and capital
expenditure.
3. Net Cash balance is cash and cash equivalents in FY22 and is cash and cash
equivalents less interest-bearing borrowings (excluding leases under IFRS16
and net of unamortised arrangement fees of £0.6m) in FY21.
Alex Vaughan, Chief Executive Officer, commented:
"Our performance in 2022 delivered strong growth in revenue and operating
profits, with significant free cash flow, ending the year with a net cash
position of £123.8m. I am pleased that we have grown our core complex
programme delivery revenue and further strengthened our consultancy market
position. Consequently, we are seeing good opportunities emerge in our chosen
sectors, at margins we aspire to.
"Costain has effectively negotiated the challenges of material availability
and inflation, as well as delays to some contract awards, delivering a robust
operational performance. We expect to increase margins as we enact further
operational improvements in the business during 2023 and beyond, and as we
continue to grow the scale of our consultancy services.
"While we are mindful of the macro-economic backdrop, the quality and nature
of our secured and preferred bidder work gives us good visibility on future
revenue and we remain confident in the Group's strategy and long-term
prospects."
FY 22 highlights
· Adjusted(1) revenue up 20.6% and reported revenue increase of 25.2%.
· Growth in profitability with adjusted operating profit(1) up 20.6% to
£36.3m (FY21: £30.1m). Adjusted operating margin was unchanged at 2.6%
(FY21: 2.6%), as volume increases and an improved mix and operational
improvements were offset by inflationary impacts, targeted up-front investment
in our consultancy capability, and increased bid activity on a series of major
opportunities, primarily in Transportation. Our H2 22 adjusted operating
margin was 3.0% (H2 21: 3.0%), an increase on 2.1% in H1 22 (H1 21: 2.1%).
· Strong adjusted free cash flow(2) in FY22 of £72.9m reflected
continued enhanced working capital management which benefitted from cash
collection timings prior to year-end, and operating profit growth. The
year-end net cash position of £123.8m includes the previously disclosed
payment of £43.4m relating to the Peterborough & Huntingdon contract in
February 2022.
Operating performance
· Health & Safety performance. Our people are our principal asset,
and their safety remains our number one priority. As previously reported, in
July, the Group experienced a fatality on one of its rail contracts, and
following our investigation, to prevent a recurrence we are implementing a
number of recommendations across our business including changes to current
industry practice. Our LTIR rate was 0.09 (FY21: 0.15) with an Accident
Frequency Rate of 0.05 (FY21: 0.05).
· Transportation revenue strong growth in FY22 in Road and Rail
including HS2, with £746m of revenue secured for FY23, reflecting our major
complex programme delivery contracts in Road, Rail, and Integrated Transport.
In FY22 we were appointed as a delivery assurance partner for the A303 road
upgrade, design partner to TfL on several schemes, solution partner to
Heathrow, and construction partner on the A66 highway scheme.
· Natural Resources significantly improved performance reflecting growth
in Water and in both consultancy-led markets of Energy and Defence. We saw
strong margin uplift due mainly to operational improvements.
· Good visibility for FY23 with more than £1.0bn of revenue already
secured(3) for 2023 at year-end, representing around 80% of expected revenue,
and a good pipeline of growth expected from secured and preferred bidder
frameworks.
· High quality order and preferred bidder book(3) position total of
£4.4bn (FY21: £4.3bn)
· A high-quality order book of £2.8bn at end of FY22 (FY21: £3.4bn),
reflecting mainly market cycles, risk management of contract bidding and the
timing of major contract bids with awards expected in FY23.
· Preferred bidder book of £1.6bn (FY21: £0.9bn), reflecting bids and
contracts mainly in Road, Water and Integrated Transport, including Heathrow
H7 and the A66.
1. See notes 1 to 4 of the financial statements for adjusted metric
details and definitions, and reconciliation to reported metrics.
2. Free cash flow is defined as cash from operations, excluding
adjusting items and pension deficit contributions, less taxation and capital
expenditure.
3. Order book and secured revenue includes revenue from contracts which
are partially or fully unsatisfied and probable revenue from water frameworks
included at allocated volume.
Additional business information
FY22 FY21 Change
Business metrics
Order book(1) at 31 December (£bn) 2.8 3.4 -18%
Preferred order book(1) at 31 December (£bn) 1.6 0.9 78%
Revenue secured(2) for following year (£m) 1,004 1,034 -3%
Lost time injury rate (LTIR) 0.09 0.15 -40%
Absolute GHG emissions (scope 1-3) tCO(2)e 36,283 42,722 -15%
1. See page 6 'Business model resilience and strategic positioning
benefits' for order book and preferred book details and definitions.
Enquiries
Investors and analysts
Paul Sharma, Costain
+44 (0) 7867 501188
Financial media - Headland
costain@headlandconsultancy.com
(mailto:costain@headlandconsultancy.com)
Andy Rivett-Carnac
+44 (0) 7968 997 365
Charlie Twigg
+44 (0) 7946
494 568 (tel:+44%20(0)79%204649%204568)
Analyst & investor presentation
A live webcast of our results by Alex Vaughan (CEO) and Helen Willis (CFO)
will be at 9am on 14 March 2023.
Please go to https://stream.brrmedia.co.uk/broadcast/63ca6b44777efd4a8b512438
(https://stream.brrmedia.co.uk/broadcast/63ca6b44777efd4a8b512438) to
register for the event.
Board changes
Tony Quinlan assumed the additional responsibilities of senior independent
director on 12 January 2022 following Alison Wood stepping down from the Board
on 28 January 2022. Jacqueline de Rojas became Remuneration Committee chair on
an interim basis from 12 January 2022 to 5 May 2022 when Fiona MacAulay became
chair of the Committee having joined the Board on 6 April 2022.
On 9 March 2022, Costain announced that Paul Golby had decided to step down as
chair and non-executive director and, as announced on 27 September 2022, Kate
Rock joined the Board as an independent non-executive director and chair
designate on 1 November 2022. Kate succeeded Paul as chair of the Board and
chair of the Nomination Committee on 1 December 2022 when Paul stepped down
from the Board.
Use of alternative performance measures
Throughout this release we use a number of 'adjusted' measures to provide
users with a clearer picture of the underlying performance of the business. To
aid understanding of the underlying and overall performance of the Group,
certain amounts that the Board considers to be material or non-recurring in
size or nature, or related to the accounting treatment of acquisitions, are
adjusted because they are not long term in nature and will not reflect the
long-term performance of the Group. This is in line with how management
monitors and manages the business on a day-to-day basis. These adjustments are
discussed in further detail in notes 1 to 4 on pages 26 to 36.
GROUP TRADING PERFORMANCE
A Strong Financial Performance
We report both our statutory results, 'reported', and results excluding
adjusting items, 'adjusted'. Key adjusting items for FY22 include the impact
of restructuring and reorganisation, impairment of tangible assets and an
insurance receipt relating to the Peterborough & Huntingdon contract.
Reported revenue increased from £1,135.2m in FY21 to £1,421.4m in FY22, an
increase of 25.2%, and adjusted revenue was up 20.6% to £1,421.4m (FY21:
£1,178.6m) driven by increased volumes in complex programme delivery and the
impact of inflation, as well as increased revenue in our consultancy-led
sectors, predominantly in Energy and Defence.
Reported operating profit increased from £9.5m loss in FY21 to £34.9m profit
in FY22, while adjusted operating profit grew by 20.6% to £36.3m (FY21:
£30.1m), driven by improved profitability in Natural Resources. The adjusted
operating margin was unchanged at 2.6% (FY21: 2.6%) and reflected volume
increases, an improved mix and operational improvements, offset by the impact
of inflation costs, up-front investment in our consultancy capability, and the
additional cost of increased bid activity on a series of major opportunities
during FY22, primarily in Transportation. H2 22 adjusted operating margin was
3.0% (H2 21: 3.0%).
Adjusted profit before tax was up 30.0% to £34.2m (FY21: £26.3m), while
adjusted basic earnings per share (EPS) was higher by 3.1% at 9.9p (FY21:
9.6p) due to increased profitability partially offset by the recognition of a
tax credit in FY21 benefitting the prior year comparable. Reported profit
before tax was £32.8m (FY21: £13.3m loss) reflecting the £43.4m provision
for the Peterborough & Huntingdon contract in FY21. Reported basic
earnings per share (EPS) was 9.4p (FY21: 2.1p loss) reflecting the above.
Adjustments to reported items
We incurred £5.0m (FY21: £nil) of restructuring costs on our Transformation
programme, £0.7m (FY21: £nil) of reorganisation costs, £1.4m (FY21: £nil)
of aged tunnel boring machine write-off costs, and £nil (FY21: £0.4m) on
amortisation of acquired intangible assets. We also recognised an insurance
receipt of £5.2m (FY21: £nil) relating to the Peterborough & Huntingdon
contract, as well as a profit of £0.5m (FY21: £nil) on the sale of a
non-core asset.
Cashflow and liquidity
Adjusted free cash inflow was £72.9m in FY22 (FY21: £53.1m), reflecting
continued enhanced working capital management and increased adjusted
profitability. Cash from operations was £16.7m, (FY21: £33.2m), and was
lower in FY22 than FY21 following the expected settlement of the Peterborough
& Huntingdon contract of £43.4m in February 2022. Partially offsetting
this settlement payment, we received £5.2m from an insurance claim during
FY22 relating to the Peterborough & Huntingdon contract.
During FY22 we paid more than 98% of invoices within 60 days. Costain has been
ranked as one of the top three fastest-paying main contractors in construction
following the submissions to the Government's Duty to Report on Payment
Practices and Performance.
Reflecting the above, this resulted in a net cash position at the end of FY22
of £123.8m (FY21: £119.4m), considerably higher than market expectations.
Business model resilience
Our markets remain characterised by strong customer demand and Costain enjoys
good overall forward visibility with our combined order book and preferred
bidder book at FY22 increasing to £4.4bn (FY21: £4.3bn). This combined view
is increasingly relevant as we anticipate a shift in our business mix towards
the preferred bidder book as we secure long-term framework positions with our
customers.
Our order book stood at £2.8bn at the end of FY22 (FY21: £3.4bn). This
reduction reflected the timing of major contract bids, our customers'
investment programmes, maintaining discipline in contract selection and the
shorter lead time of consulting and digital work. The order book evolves as
contracts progress and as new contracts are added at periods aligned to our
customers' strategic procurement windows which are typically every five years,
therefore it does not provide a complete picture of potential future revenue
expectations.
The preferred bidder book grew to £1.6bn (FY21: £0.9bn), with the main
additions being contracts in Road, Water and Integrated Transport, including
Heathrow and the A66 contract. The preferred bidder book comprises awards for
which there is no other competitor and we are in final negotiations prior to
entering a contract, or exclusive frameworks where a further works order is
required.
We note that some of our framework and consulting revenue is not recorded in
our order book, or preferred bidder book. We have more than £1bn of secured
revenue for FY23 at year end, representing around 80% of revenue.
The Transport, Water, Energy and Defence markets continue to offer
opportunities for the Group. For example, we expect Water investment to double
during the next regulatory period. Headwinds are being experienced with delays
to the timing of some contract awards. We have good momentum going into FY23
and are making improvements to our operational performance and strategic
priorities and remain confident of managing these headwinds.
The assessment and management of risk and uncertainty is central to our
culture, business processes and strategy. This is achieved through rigorous
risk management and commercial control throughout our operations in three key
areas:
· A disciplined approach to contract selection, which includes robust
commercial and legal reviews, proactive shaping of procurement approaches with
our customers, and a rigorous multi-stage gating process.
· Commercial and operational assurance, which includes project level
controls, our Operational Excellence Model (OEM), and management oversight of
forecasts, and cross-disciplinary contract review meetings on all projects.
· Strategic supply chain partners, with application of robust supply
chain management processes.
As a result of the implementation of our strategy and risk management
processes, at year end FY22, our order book does not include any fixed-price
construction contracts.
Capital allocation
We understand the importance of delivering long-term sustainable value for
shareholders and are committed to maintaining a balanced approach between
investment in the business for growth, maintaining a strong balance sheet and
returns to shareholders. We look to prioritise uses of cash as follows:
1. Investing for growth - disciplined investment in key areas such as
bidding activity and digital to help accelerate our business transformation.
2. Progressive dividend - the Board recognises the importance of
dividends for shareholders and expects to target dividend cover of around
three times underlying earnings taking into account the cash flow generated in
the period.
3. Selective M&A - retaining optionality to pursue strategic
investments in technology, skills and capabilities to enhance our ability to
support customers in the face of significant change.
4. Returning surplus capital - after ensuring a strong balance sheet and
cash position, surplus capital is identified and returned to shareholders
through share buy backs or special dividends.
Dividends
During the last two years, the Group has made very significant progress in its
operating cash generation, demonstrated by our strong year end cash position
and operating cash flow in FY22.
A resilient business model and strong balance sheet is fundamental to our
ability to win business and manage risk. At the same time, the Board
recognises the importance of dividends to shareholders and remains committed
to returning to dividend payments when appropriate.
Outlook
Looking ahead, despite the market headwinds and as a result of our broad
customer focus, we have already secured more than £1bn of revenue,
representing around 80% of expected revenue for 2023.
We remain mindful of the macro-economic and geopolitical backdrop, recognising
the challenges it has created for inflation and energy costs and its
importance for near-term government priorities and timing of spending. With
our broad customer focus, further improvements to our operational performance,
strong cash position and clear strategic priorities, we remain confident of
navigating these market headwinds and are well positioned for further growth.
We expect to increase our net cash position in FY23, building on what was a
very positive year for cash in FY22. As a result of the successful
implementation of our strategy and ongoing operational improvements, benefits
from our Transformation programme and our revenue mix expectations, we expect
to deliver an adjusted operating margin run-rate of 3.5% during the course of
FY24 and 4.5% during the course of FY25; in line with our ambition to deliver
margins in excess of 5%. We remain confident in the Group's strategy and
longer-term prospects.
STRATEGY UPDATE
In order to meet the UK's key critical needs, there is more than £600bn of
infrastructure investment planned by 2030, underpinned by legislative and
regulatory commitments, as the government and private customers address
today's mega trends. These include climate change/climate resilience and the
net zero imperative; resource, environmental and economic resilience;
addressing inequality and low levels of regional and national growth; and the
need for infrastructure transformation to support affordability and investment
growth plans.
We are strategically positioned in our four chosen markets of Transport,
Water, Energy and Defence, where we believe long-term strategic investment
will be prioritised and will provide for a diversified and resilient business.
Our market focus, combined with our differentiated offering, positions the
business strongly to benefit from our customers' long-term investment plans,
providing significant opportunities for growth in profitability and margins.
We have specifically chosen to work with those customers who wish to partner
with us to help them shape, create and deliver their business plan commitments
and investment programmes, and navigate the challenges facing their
businesses. Our unique expertise and focus on our key sectors enable us to
understand the specific needs of our customers across their strategic,
operational and asset creation requirements. With our broad service offering,
we can service more of the market and are creating greater competitive
advantage. We work as construction, consulting and digital infrastructure
partners, solving problems and delivering innovative engineered solutions. Our
vision is to create connected, sustainable infrastructure to help people and
the planet thrive.
We are focused on three strategic priorities to drive our strategic ambition.
Performance
Key measures of our performance include:
o Strong financial performance.
o Business resilience.
Strong financial performance
During FY22, we continued to improve our capabilities and our strong risk
management processes on contracts, delivering a robust operational
performance. In addition, we have secured further opportunities with our
customers, demonstrating our strategic progress.
Our strategy is delivering a transformation in the business in terms of
assured delivery, lower risk contracts in our orderbook, and a broader
business mix; and our ambition remains to deliver improving long-term
operating margins.
Our pathway towards higher margins, as we exit H2 22 at 3.0% adjusted
operating margin, is to deliver:
· An adjusted operating margin run-rate of 3.5% during the course of
FY24, as we increase effectiveness within the business through the
implementation of our Transformation plan, the implementation of our Operating
Excellence Model (OEM), growth of consultancy services and increased
effectiveness in procurement and ongoing control of operating costs.
· An adjusted operating margin run-rate of 4.5% during the course of
FY25 to be reached by improving margins within complex programme delivery
(construction contracts), further efficiencies from our Transformation plan,
our OEM and an increasing mix of higher-margin contracts.
· We continue to have an ambition for an adjusted operating margin in
excess of 5% and to play a role as a digital partner improving business
performance, as investment in this area increases.
We expect that central costs will be held around 0.8% to 0.9% of revenue
during FY23 to FY25 and we expect divisional margins to increase during the
period to achieve our Group target. We continue to monitor the impact of
inflationary pressures on FY23 revenue and costs.
Business Resilience
During FY22, we have:
· Continued to embed our risk controls in securing new business (contract
selection, independent risk review and enhanced legal process). As a result,
we have managed the risk and return criteria of contracts to meet our
requirements and chose not to bid on a small number of opportunities during
the year.
· Enhanced operational contract delivery via an OEM, comprehensive
financial reviews, and senior management ownership.
· Further grown our delivery partner consultancy roles building on our
current positions with AWE, Babcock, Cadent and National Highways, and
Heathrow, which is a new customer, where we will work for Heathrow as solution
delivery partner providing construction, consulting and digital capabilities
over its next regulatory period.
· Grown our energy operations, including the award of the bp net zero
project for carbon capture and storage, Industrial Cluster footprint growth,
and new framework awards for other major energy customers.
· Broadened our design services, including the award of the TfL Piccadilly
line improvements and water process solutions.
· Been appointed in a Costain/Mott MacDonald joint venture by National
Highways as Delivery Assurance Partner for the A303 Stonehenge Improvements
Scheme
(https://mcas-proxyweb.mcas.ms/certificate-checker?login=false&originalUrl=https%3A%2F%2Fnationalhighways.co.uk.mcas.ms%2Four-work%2Fa303-stonehenge%2F%3FMcasTsid%3D15600&McasCSRF=072fb2b91a45dd86acb6c6b4656d785a1973019b27fc651ca0f061c47f394c3a)
, our fifth delivery partner major consultancy commission.
People
Safety, diversity and inclusion, wellbeing and social impact are key concerns
for the Group.
During FY22:
• Our Accident Frequency Rate in FY22 was 0.05 (FY21: 0.05) alongside a
Lost Time Injury Frequency Rate of 0.09 (FY21: 0.15).
· In September 2022, we hosted our National Inclusion Week as we continue
to develop a more inclusive culture.
• In 2022, we ran a Best Companies employee engagement survey, and we
were recognised by Best Companies as a very good company to work for.
• We have also recognised that the cost of living is significantly
affecting many of our people and have taken several actions to give as much
support as possible, including one-off payments, an employee discount scheme,
a money management app and a financial education programme. Our response to
the cost-of-living crisis will be for the long-term and we are continuously
reviewing the support we can offer.
· Through our Employee Forums and wider stakeholder network, we have
refreshed our Values and linked them to core behaviours that will enhance the
delivery of our strategy. Our core Values are Integrity, Customer Focus,
Safety & Wellbeing and Environmental & Social Responsibility. Our core
behaviours are to be curious, collaborative, courageous and caring.
Our people are our principal asset, and their safety remains our number one
priority. It was deeply saddening to report In July that the company
experienced a fatality on one of its rail contracts. Following our
investigation, to prevent a recurrence we are implementing a number of
recommendations across our business, including changes to current industry
practice.
Planet
Delivering our climate change action plan remains our highest environmental
priority, with the Group focused on reducing operational emissions in line
with PAS 2080 and working with designers to increase to scale the use of
transitional materials. These initiatives will be essential elements in
Costain meeting our objective to be net zero carbon by 2035. In 2022 we
submitted our climate change action plan to the Science Based Target
initiative (SBTi) and we await the outcome of our application.
We continue to implement our climate change action plan, while also working
with our customers on a wide range of projects to enable them to reach their
Environmental, Social and Governance (ESG) targets, using a broad range of
technologies. These include the drive towards using hydrogen and reducing the
use of carbon in infrastructure.
During FY22:
• All relevant contracts now have a carbon baseline target and
implementation plan on how they will achieve their target in line with PAS
2080.
• We continue to improve climate and carbon literacy of our broader
leadership team, with colleagues completing our bespoke in-house training. We
plan to increase training completion to all our identified colleagues,
ensuring we have the necessary skills and literacy to drive our journey to net
zero carbon.
• In 2022, HS2's site Canterbury Road Vent Shaft in South Kilburn, became
the first diesel-free site, while the Euston Approaches and Victoria Road
Crossover Box sites also achieved diesel-free status. This led to the project
being awarded the gold standard by the Supply Chain Sustainability School.
• We have trialled a hydrogen-powered generator on the Preston Western
Distributor Road project's M55 compound. This trial is the first of its kind
for Lancashire County Council, and together with hydrogen start-up Hydrologiq,
we demonstrated carbon savings from onsite operations of between 70% and close
to 100%, when powered by grey and green hydrogen respectively.
· Costain is working with Dwr Cymru Welsh Water, Wales and West Utilities,
and food and drink manufacturer Princes Group on a feasibility study to
produce hydrogen from biogas from the Cardiff East Wastewater Treatment Works
that will fuel boilers to provide heat for fruit juice pasteurisation.
We have a commitment to environmental improvements such as Get Nature
Positive, which drives biodiversity net gains. Our proactive position in our
four chosen markets is a catalyst for change, with green energy solutions such
as hydrogen and carbon capture, in the area of transport (rail and electric
highways), and in new water technologies.
DIVISIONAL REVIEW
TRANSPORTATION
£m FY22 adjusted(1) FY22 reported FY21 adjusted(1) FY21 reported Adjusted(1) change
Road 498.7 498.7 426.3 426.3 17.0%
Rail 480.8 480.8 356.4 356.4 34.9%
Integrated transport 66.8 66.8 81.5 81.5 -18.1%
Total revenue 1,046.3 1,046.3 864.2 864.2 21.1%
Operating profit/(loss) 31.5 30.1 41.4 49.8 -23.9%
Operating margin 3.0% 2.9% 4.8% 5.8% -1.8pp
1. See notes 1 to 4 of the financial statements for adjusted metric details
and definitions, and reconciliation to reported metrics.
· Reported and adjusted revenue of £1,046.3m was up 21.1% against prior
year as a result of increased project volumes and inflation.
· Adjusted operating margin was 3.0%, down 1.8 percentage points
compared to prior year, reflecting the impact of inflation, increased bid
activity on a series of major opportunities during the year, and targeted
up-front investment in our digital capability.
· Contract wins of £427.5m secured in the year. FY23 secured revenue is
£746.0m.
Our revenue growth was driven mainly by complex scheme delivery for High Speed
2 (HS2) and National Highways, which currently represent the majority of
Transportation revenue. In FY21, the division outperformed our expectations
and in FY22, we have experienced more typical returns, with inflation having a
distorting impact lowering margins on a small number of contracts.
Road reported and adjusted revenue increased by 17.0% in FY22 over the prior
year driven by increased schemes delivery and the impact of inflation on
delivery costs. As a strategic partner for National Highways, we support their
key investment programmes through the Regional Delivery Partnerships (RDP)
major projects framework, and the Smart Motorways Programme (SMP) Alliance
delivering smart motorway upgrades.
On RDP, we continued to upgrade the A1 around Newcastle, with the A1 Scotswood
to North Brunton scheme opening early, and we are upgrading to dual
carriageway a section of both the A1 Birtley to Coal House and the A30 in
Cornwall. Pre-construction and design activities continue on the A12
Chelmsford to A120 scheme, M60 Simister Island scheme and we completed and
opened early the A19 improvements at Downhill Lane.
With the SMP Alliance, our work delivering the M6 Junction 21a-26 smart
motorway upgrades continues, and we delivered infrastructure for cameras to
detect stopped vehicles, and safety improvements to the central reserve on M62
junction 25-30.
During 2022, National Highways selected Costain as one of its Delivery
Integration Partners for the A66 Northern Trans-Pennine project which will
upgrade east-west connectivity in the north of England; and in joint-venture
with Mott MacDonald, Costain was appointed as Delivery Assurance Partner for
the A303 Stonehenge Improvements Scheme. Costain also continued to provide
specialist advice to National Highways under the SPaTS2 framework, to shape
the future and help critical challenges around automation, decarbonisation and
future programme delivery.
Rail reported and adjusted revenue increased by 34.9% in 2022, principally as
a result of our growth of work in delivering HS2.
December 2022 saw the Costain Skanska joint venture (JV) successfully complete
its seven-year programme of enabling works for the HS2 route from Euston to
West Ruislip. The follow-on contract with the Skanska Costain STRABAG JV to
construct the same section of route in twin bore tunnel was fully mobilised
during 2022 and launched the first two of seven tunnel boring machines (TBMs).
The completion of rail heads at Willesden and at Northolt means the TBMs are
fully serviced by rail, removing thousands of heavy lorry journeys from local
roads. Our project-wide carbon reduction initiatives have set the path to
reduce CO(2) emissions by around 40% and led to the first fully diesel-free
sites on the HS2 programme.
Throughout the year our specialist planning and constructability teams have
continued to support HS2 by producing information for the Hybrid Bill
submission that will promote the 'levelling up' agenda and enable the HS2
route from Crewe on to Manchester.
Our work on the Gatwick Airport Station Project for Network Rail continues
with the opening of platform 5 and 6 enabling Network Rail timetable
improvements, and we expect to finish work on this project during FY23. We
completed our final work on Crossrail, with the Elizabeth Line successfully
opening during the year. We continue to expand our portfolio of work for
Network Rail through our framework contracts.
Integrated Transport provides a mix of consulting and complex project delivery
to Local Authorities, Central Government and to customers in Aviation.
Reported and adjusted revenue decreased by 18.1% in FY22 on the prior year,
reflecting the timing of complex schemes delivery. We continue to focus on
supporting customers with inter-modal connectivity and decarbonisation
solutions.
During 2022, we completed work on A40 Westway for Transport for London (TfL)
and initiated work for TfL for the Gallows Corner project. We extended the
contract for CCTV video management system for TfL for a further four years and
we were appointed by TfL to design critical upgrades to the signalling
infrastructure on the Piccadilly line.
Our delivery of the Preston Western Distributor Project continues to plan, and
we continue to support Lancashire County Council with advice in the
development of their South Lancaster highway scheme. We have successfully
grown consulting services revenue across a range of local authorities, such as
Lancaster, Bradford, Liverpool and in Cornwall.
During the year, we announced that we are a delivery partner to Heathrow
Airport, providing construction, consulting and digital capabilities to help
deliver its new investment programme. We will work with Heathrow throughout
project lifecycles to shape, create and deliver asset renewal and construction
projects through the Terminal Asset Renewal Partner and Major Project Partner
lots of the H7 framework. The first commission is the design phase of the
upgrade of baggage handling facilities and systems at Terminal 2, via the
Major Project Partner lot. We also have secured work for ZEFI (zero emissions
flight infrastructure) and with other aviation customers at Stansted, Gatwick
and Manchester airports.
We continue to grow our consulting services to local government customers in
support of accelerating progress to net zero carbon (including a
decarbonisation project for Swindon council), green economic recovery and
levelling up the UK, and have secured places on a number of targeted
frameworks.
Costain has continued its growth with the UK Government in helping deliver key
policy interventions including embedment of the Construction Playbook,
securing our borders through infrastructure investment and accelerating
decarbonisation through being involved in projects such as the Electric Roads
System and Net Zero Innovation programme.
NATURAL RESOURCES
£m FY22 adjusted(1) FY22 reported FY21 adjusted(1) FY21 reported Adjusted(1) change
Water 238.2 238.2 200.0 200.0 19.1%
Energy 79.0 79.0 72.0 28.6 9.7%
Defence 57.9 57.9 42.4 42.4 36.6%
Total revenue 375.1 375.1 314.4 271.0 19.3%
Operating profit/(loss) 15.0 19.5 (2.6) (50.6) N/A
Operating margin 4.0% 5.2% -0.8% -18.7% 4.8pp
1. See notes 1 to 4 of the financial statements for adjusted metric details
and definitions, and reconciliation to reported metrics.
· Adjusted revenue was £375.1m, up 19.3% driven by increased activity
levels in all three sectors and particularly across AMP7 water programmes.
· Adjusted operating profit was £15.0m, up £17.6m, and adjusted
operating margin was 4.0%, 4.8 percentage points higher compared to prior
year, due to an improved operational performance as well as revenue growth, in
particular from new higher margin contracts within Energy, partially offset by
targeted up-front investment in our consultancy and digital capabilities, and
increased bid activity.
· Contract wins of £69.1m secured in the year. FY23 secured revenue is
£257.0m.
· As reported in FY21, we recognised a provision in respect of one water
contract. There was no adverse net impact to the income statement in FY22 and
no material net impact is expected going forward. See note 2 for further
details.
Water delivers a broad range of services to improve asset and operational
resilience across the water sector, together with decarbonisation
capabilities. Reported and adjusted revenue was up £38.2m, 19.1% on the prior
year with good visibility across our five-year water AMP7 programmes through
to 2025. We have made good progress in delivering on Tideway where, in a joint
venture, we are responsible for the eastern section.
The breadth of our service offering continues to grow with capital delivery
programmes for Anglian Water, Severn Trent Water, Southern Water, and Thames
Water; maintenance service provider services for United Utilities; a range of
consultancy services for Yorkshire Water, Thames Water, Southern Water, and
Welsh Water; digital services to Anglian Water and data and clear energy
innovation projects with Ofwat.
Alongside core AMP8 requirements, we continue to engage with customers to
understand their potential needs for new value-added solutions for AMP8 to
meet their ESG requirements and are in an early stage of working with
customers regarding the Strategic Water Resource Options programme, which will
run alongside AMP8.
Energy has shown good growth, increasing by 9.7% in FY22 on the prior year.
Our contract with Cadent, managing the mains replacement across the East of
England, our Project Controls contract with EDF and our nuclear
decommissioning contract with Sellafield continue to perform strongly. We have
performed well in energy resilience and are building our position in energy
transition. Throughout FY22 we have strengthened our core strategy to support
the development of the industrial clusters throughout the UK, spearheaded by
our delivery for bp on the track 1 net zero contract at Teesside (part of the
East coast cluster) and we continue to work on the track 2 schemes including
the Acorn carbon capture and storage scheme in St Fergus, Scotland.
We have seen growth in project delivery and opportunities in supporting our
long-standing petrochemical customers in decarbonising their midstream
operations through large scale energy switching engineering projects,
including hydrogen generation and transportation. As part of our regional
focus, which includes the delivery of the South Wales Industrial Cluster, we
won an energy transition project, H2Juice, with Dwr Cymru Welsh Water, Wales
and West Utilities which uses hydrogen to decarbonise carbon-intensive
industries and was funded by BEIS.
Defence supports several public and private sector organisations, in a variety
of customer-side, delivery partnership roles, across the UK defence nuclear
enterprise. Reported and adjusted revenue increased by £15.5m, 36.6% on the
prior year, driven by a growth in demand for support within our current
delivery partnership roles, with Babcock and the Atomic Weapons Establishment
(AWE). In both contracts, we work alongside the customer, as a construction
delivery partner, delivering major infrastructure projects, providing
expertise in design and construction management, and the coordination of the
work of several subcontractors.
We also provide ongoing support to the Defence Nuclear Organisation (DNO),
helping it develop portfolio management capabilities and developing its
programme definition for future infrastructure requirements. We provide
customer-side support to BAE Systems, in the form of portfolio management
expertise on the Dreadnought programme, to replace the Royal Navy's Trident
missile Vanguard Submarines. We are currently well positioned across the
defence nuclear enterprise, supporting the UK's Continuous at Sea Deterrent
(CASD), and our ambition is to be the delivery partner of choice for the
Ministry of Defence's (MoD) strategic infrastructure needs.
To maximise the potential for growth, we have combined our Defence and Nuclear
activities, bringing together capability for the division in a more
operationally efficient and effective structure. From H1 23 we will report
revenue reflecting the new Natural Resources structure for the Water, Defence,
and the Nuclear and Energy sectors, as we progress our activity within the
energy transition market.
FINANCIAL REVIEW
Divisional adjusted to reported reconciliation
Transportation Natural Resources Group
2022 2021 Change 2022 2021 Change 2022 2021 Change
Revenue £m
Adjusted 1,046.3 864.2 21.1% 375.1 314.4 19.3% 1,421.4 1,178.6 20.6%
Adjusting items - - - (43.4) - (43.4)
Reported 1,046.3 864.2 21.1% 375.1 271.0 38.4% 1,421.4 1,135.2 25.2%
Operating profit £m
Adjusted 31.5 41.4 -23.9% 15.0 (2.6) 36.3 30.1 20.6%
Adjusting items (1.4) 8.4 4.5 (48.0) (1.4) (39.6)
Reported 30.1 49.8 -39.6% 19.5 (50.6) 34.9 (9.5)
Adjusting items
We incurred £5.0m (FY21: £nil) of restructuring costs on our Transformation
programme, £0.7m (FY21: £nil) of reorganisation costs, £1.4m (FY21: £nil)
of older tunnel boring machine write-off costs, and £nil (FY21: £0.4m) on
amortisation of acquired intangible assets. We also recognised an insurance
receipt of £5.2m (FY21: £nil) relating to the Peterborough & Huntingdon
contract previously provided for, as well as a profit of £0.5m (FY21: £nil)
on the sale of a non-core asset. We expect additional Transformation costs in
FY23.
Net financial expense
Net finance expense amounted to £2.1m (FY21: £3.8m). The interest payable on
bank overdrafts, loans and other similar charges was £2.7m (FY21: £3.0m) and
the interest income from bank deposits amounted to £0.5m (FY21: £0.1m). In
addition, the net finance expense includes the interest income on the net
assets of the pension scheme of £1.3m (FY21: £nil) and the interest expense
on lease liabilities of £1.2m (FY21: £0.9m) under IFRS16.
Tax
The Group has a tax charge of £6.9m (FY21: £7.5m credit) giving an effective
tax rate of 21.0%. The FY21 net tax credit arose primarily from the £6.2m
impact of the tax rate change (from 19% to 25% in 2023, which has now been
substantively enacted) on deferred tax recognised in respect of losses and
pensions. The adjusted effective tax rate was 20.5% (FY21: 0.4%). We expect
the effective tax rate to remain close to the statutory tax rate of 19% until
April 2023, and 25% subsequently, giving an FY23 effective tax rate of close
to 23.5%.
Cashflow
The Group generated a £72.9m free cash inflow for the year (FY21: £53.1m).
£m FY22 FY21
Cash from operations 16.7 33.2
Add back adjusting items 46.4 11.6
Add back pension deficit contributions 10.8 10.4
Less taxation (0.5) 0.1
Less capital expenditure (0.5) (2.2)
Free cash flow 72.9 53.1
The Group had a positive net cash balance of £123.8m as of 31 December 2022
(HY22: £95.9m, FY21: £119.4m) comprising Costain cash balances of £67.3m
(HY22: £76.5m, FY21: £101.3m), cash held by joint operations of £56.5m
(HY22: £55.4m, FY21: £58.1m) and borrowings of £nil (HY22: £36.0m
excluding arrangement fees of £0.2m, FY21: £40.0m excluding arrangement fees
of £0.6m). During the year, the Group's average month-end net cash balance
was £99.2m (HY21: £91.9m, FY21: £107.0m).
£m FY22 FY21
Cash and cash equivalents at the beginning of year 159.4 150.9
Net cash flow (35.6) 8.5
Cash and cash equivalents at the end of year 123.8 159.4
Borrowings (excluding leases and unamortised arrangement fee of £0.6m in - (40.0)
FY21)
Net cash 123.8 119.4
We remain in a positive net cash position, following the final settlement
payment of £43.4m made during the first quarter of the financial year in
respect of the Peterborough & Huntingdon contract.
Financial resources
In November 2022, the Group successfully concluded its negotiations with its
bank and surety facility providers to secure a one year "amend and extend" of
its facilities.
The Group has in place banking and bonding facilities from banks and surety
bond providers to meet current and projected usage requirements, and has a
£125.0m (FY21: £131.0m) revolving credit facility with its relationship
banks with a maturity date of 24 September 2024. The revolving credit facility
remained undrawn throughout 2022. In November 2022, the Group prepaid in full
the £36.0m balance of its term loan facility from its cash resources.
In addition, the Group has in place bonding facilities of £280.0m (FY21:
£310m). Utilisation of the total bonding facilities as of 31 December 2022
was £88.8m (FY21: £100.7m).
Since the end of FY22, the Group has converted its £125.0m revolving credit
facility to a £125.0m sustainability-linked revolving credit facility with
three ESG key performance indicators.
Pensions
As at 31 December 2022, the Group's pension scheme surplus in accordance with
IAS 19, was £60.2m (HY22: £86.2m surplus, FY21: £67.1m surplus).
The movement in the IAS 19 valuation, being a slight reduction in surplus from
31 December 2021 to 31 December 2022 was due to the impact of a reduction in
the value of scheme assets, primarily due to the fall in the value of
Liability Driven Investment portfolio due to the significant increase in long
term bond yields over the year, being slightly greater than the reduction in
scheme liabilities, primarily driven by changes in the principal actuarial
assumptions, in particular a higher discount rate of 5.00% used in the IAS 19
valuation as at 31 December 2022 compared to the discount rate at 31 December
2021 of 1.80%.
Cash contributions were made to the scheme during the year amounting to
£10.8m (FY21: £10.4m) and the charge to operating profit in respect of the
administration cost of the UK Pension Scheme in the year was £0.3m (FY21:
£0.3m).
DIRECTORS REPORT
Going concern
In determining the appropriate basis of preparation of the financial
statements for the year ended 31 December 2022, the directors are required to
consider whether the Group and the Company can continue in operational
existence for the foreseeable future, being a period of at least twelve months
from the date of approval of the accounts. Having undertaken a rigorous
assessment of the financial forecasts, including its liquidity and compliance
with covenants, the Board considers that the Group has adequate resources to
remain in operation for the foreseeable future and, therefore, have adopted
the going concern basis for the preparation of the financial statements.
Please see note 1 for more details.
For and on behalf of the Board
Alex Vaughan
Helen Willis
Chief Executive Officer
Chief
Financial Officer
14 March 2023
Cautionary statement
This report contains forward-looking statements. These have been made by the
directors in good faith based on the information available to them up to the
time of their approval of this report. The directors can give no assurance
that these expectations will prove to have been correct. Due to the inherent
uncertainties, including both economic and business risk factors underlying
such forward-looking information, actual results may differ materially from
those expressed or implied by these forward-looking statements. The directors
undertake no obligation to update any forward-looking statements whether as a
result of new information, future events or otherwise.
Shareholder information
There is a large amount of information about our business on our website,
www.costain.com (http://www.costain.com) . This includes copies of recent
investor presentations as well as London Stock Exchange announcements.
GROUP INCOME STATEMENT
For the year ended 31 December 2022
£m Note 2022 2021
Revenue 4 1,421.4 1,135.2
Cost of Sales (1,328.7) (1,095.0)
Gross profit 92.7 40.2
Administrative expenses (57.8) (49.7)
Operating profit/(loss) 34.9 (9.5)
Share of results of joint ventures and associates - -
Profit/(loss) from operations 4 34.9 (9.5)
Finance income 5 1.8 0.1
Finance expense 5 (3.9) (3.9)
Net finance expense (2.1) (3.8)
Profit/(loss) before tax 32.8 (13.3)
Taxation 6 (6.9) 7.5
Profit/(loss)for the year attributable to equity holders of the parent 25.9 (5.8)
Earnings/(loss) per share
Basic 7 9.4p (2.1)p
Diluted 7 9.4p (2.1)p
GROUP STATEMENT OF COMPREHENSIVE INCOME AND EXPENSE
For the year ended 31 December 2022
£m 2022 2021
Profit/(loss) for the year 25.9 (5.8)
Items that may be reclassified subsequently to profit or loss:
Cash flow hedges:
Effective portion of changes in fair value during year - 0.3
Total items that may be reclassified subsequently to profit or loss - 0.3
Items that will not be reclassified to profit or loss:
Remeasurement of retirement benefit asset (18.7) 62.7
Tax recognised on remeasurement of retirement benefit asset 3.9 (15.6)
Total items that will not be reclassified to profit or loss (14.8) 47.1
Other comprehensive (expense)/income for the year (14.8) 47.4
Total comprehensive income for the year attributable to equity holders of the 11.1 41.6
parent
GROUP BALANCE SHEET
As at 31 December 2022
£m Note 2022 2021
Assets
Non-current assets
Intangible assets 9 52.2 52.5
Property, plant and equipment 10 26.6 32.0
Equity accounted investments 0.4 0.4
Retirement benefit asset 60.2 67.1
Trade and other receivables 3.5 5.5
Insurance recovery asset 4.0 -
Deferred tax 14.5 15.4
Total non-current assets 161.4 172.9
Current assets
Inventories 0.2 0.3
Trade and other receivables 187.4 199.6
Insurance recovery asset 9.4 -
Taxation - 0.2
Cash and cash equivalents 11 123.8 159.4
Total current assets 320.8 359.5
Total assets 482.2 532.4
Liabilities
Non-current liabilities
Other payables 1.1 1.8
Interest bearing loans and borrowings - 32.0
Lease liabilities 15.0 18.2
Provisions for other liabilities and charges 3.7 -
Total non-current liabilities 19.8 52.0
Current liabilities
Trade and other payables 232.5 215.1
Taxation 0.2 -
Interest bearing loans and borrowings - 7.4
Lease liabilities 9.1 8.6
Provisions for other liabilities and charges 9.4 50.3
Total current liabilities 251.2 281.4
Total liabilities 271.0 333.4
Net assets 211.2 199.0
Equity
Share capital 13 137.5 137.5
Share premium 16.4 16.4
Translation reserve 0.6 0.6
Hedging reserve - -
Retained earnings 56.7 44.5
Total equity 211.2 199.0
GROUP STATEMENT OF CHANGES IN EQUITY
For the year ended 31 December 2022
£m
Share capital Share premium Translation reserve Hedging reserve Retained earnings Total equity
At 1 January 2021 137.5 16.4 0.6 (0.3) 2.3 156.5
Loss for the year - - - - (5.8) (5.8)
Other comprehensive income - - - 0.3 47.1 47.4
Shares purchased to satisfy employee share schemes - - - - (0.2) (0.2)
Equity-settled share-based payments - - - - 1.1 1.1
At 31 December 2021 137.5 16.4 0.6 - 44.5 199.0
At 1 January 2022 137.5 16.4 0.6 - 44.5 199.0
Profit for the year - - - - 25.9 25.9
Other comprehensive expense - - - - (14.8) (14.8)
Equity-settled share-based payments - - - - 1.1 1.1
At 31 December 2022 137.5 16.4 0.6 - 56.7 211.2
GROUP CASH FLOW STATEMENT
For the year ended 31 December 2022
£m Note 2022 2021
Cash flows from/(used by) operating activities
Profit/(loss) for the year 25.9 (5.8)
Adjustments for:
Share of results of joint ventures and associates - -
Finance income 5 (1.8) (0.1)
Finance expense 5 3.9 3.9
Taxation 6 6.9 (7.5)
Profit on disposals of property, plant and equipment (1.8) -
Impairment of investment in joint venture 6.5 -
Depreciation of property, plant and equipment 10 11.3 12.9
Amortisation and impairment of intangible assets 9 0.6 1.1
Shares purchased to satisfy employee share schemes - (0.2)
Share-based payments expense 1.1 1.1
Cash from operations before changes in working capital and provisions 52.6 5.4
Decrease in inventories 0.1 0.3
(Increase)/decrease in receivables (2.9) 17.7
Increase/(decrease) in payables 15.9 (29.9)
Movement in provisions and employee benefits (49.0) 39.7
Cash from operations 16.7 33.2
Interest received 1.8 0.1
Interest paid (3.9) (3.9)
Taxation (paid)/received (0.5) 0.1
Net cash from operating activities 14.1 29.5
Cash flows from/(used by) investing activities
Additions to property, plant and equipment (0.2) (0.7)
Additions to intangible assets (0.3) (1.5)
Proceeds on disposals of property, plant and equipment 2.6
Addition to cost of investment in joint venture (3.4) -
Net cash used by investing activities (1.3) (2.2)
Cash flows from/(used by) financing activities
Repayments of lease liabilities (8.4) (10.8)
Repayment of loans (40.0) (8.0)
Net cash used by financing activities (48.4) (18.8)
Net (decrease)/increase in cash and cash equivalents (35.6) 8.5
Cash and cash equivalents at beginning of the year 11 159.4 150.9
Cash and cash equivalents at end of the year 11 123.8 159.4
NOTES TO THE FINANCIAL STATEMENTS
1. BASIS OF PREPARATION
Costain Group PLC ("the Company") is a public limited company domiciled in
England and incorporated in England and Wales. The consolidated financial
statements of the Company for the year ended 31 December 2022 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 UK-adopted international accounting standards and with the requirements
of the Companies Act 2006 as applicable to companies reporting under those
standards. In preparing the financial statements of the Group we performed an
assessment of the impact of climate change, with reference to the disclosures
made in the Strategic report. There has been no material impact on the
financial statements for the current year from the Group's assessment of the
impact of climate change, including estimates and judgements made,
specifically in relation to long-term contract accounting.
A duly appointed and authorised committee of the Board of directors approved
the preliminary announcement on 14 March 2023. The financial information set
out above does not constitute the Company's statutory accounts for the years
ended 31 December 2022 and 2021 but is derived from those accounts. Statutory
accounts for 2021 have been delivered to the Registrar of Companies and those
for 2022 will be delivered in due course.
The auditor has reported on these accounts. Their report for 2022 was (i)
unqualified and (ii) did not contain a statement under section 498(2) or (3)
of the Companies Act 2006. Their report for the accounts of 2021 was (i)
unqualified, and (ii) did not contain a statement under section 498(2) or (3)
of the Companies Act 2006.
While the financial information included in this preliminary announcement has
been prepared in accordance with UK-adopted international accounting
standards, this announcement does not itself contain sufficient information to
fully comply with UK-adopted international accounting standards.
The accounting policies have been applied consistently by the Group to each
period presented in these financial statements.
Going concern
The Group's principal business activity involves work on the UK's
infrastructure, mostly delivering long-term contracts with a number of
customers. To meet its day-to-day working capital requirements, it uses cash
balances provided from shareholders' capital and retained earnings and its
borrowing facilities. In November 2022, the Group successfully concluded its
negotiations with its bank and surety facility providers to secure a one year
"amend and extend" of its borrowing facilities. These borrowing facilities
give the Group access to an RCF cash drawdown component of £125.0m with a
maturity date of 24 September 2024.
These facilities have a leverage covenant of net debt/EBITDA ≤1.5 times, an
interest covenant of EBITA/net interest payable covenant of ≥4.0 times and a
liquidity covenant whereby the aggregate of, without double counting, any cash
and cash equivalent investments and the available commitment under the
facility does not fall below £50.0m. These financial covenants are tested
quarterly. As at 31 December 2022, the Group had a leverage covenant ratio of
below zero (the Group had no net debt) and an interest covenant ratio of 16.1
times. As part of its contracting operations, the Group may be required to
provide performance and other bonds. It satisfies these requirements by
utilising its £30m bank bonding and £250m surety company bonding facilities.
In determining the appropriate basis of preparation of the financial
statements for the year ended 31 December 2022, the directors are required to
consider whether the Group and the Company can continue in operational
existence for the foreseeable future, being a period of at least twelve months
from the date of approval of the accounts. Having undertaken a rigorous
assessment of the financial forecasts, including its liquidity and compliance
with covenants, the Board considers that the Group and the Company have
adequate resources to remain in operation for the foreseeable future and,
therefore, have adopted the going concern basis in the preparation of the
financial statements.
In assessing the going concern assumption, the Board reviewed the Group's base
case plans for the period to 30 June 2024, being the first covenant deadline
more than 12 months after the approval of the financial statements. The
directors have assumed that the current RCF remains in place with the same
covenant requirements through to its current expiry date, which is beyond the
end of the period reviewed for Going Concern purposes. The directors have
assessed that the Group will either renew the facility thereafter or agree an
alternative source of finance for the subsequent period. The base case assumes
delivery of the Board approved strategic and financial plans. As part of the
assessment, the Board also identified severe but plausible downsides affecting
future profitability, working capital requirements and cash flow. The severe
but plausible downsides include applying the aggregated impact of lower
revenue, lower margins, higher working capital requirements and adverse
contract settlements.
Both the base case and severe but plausible forecasts show significant
headroom and indicate that the Group will be able to operate within its
available banking facilities and covenants throughout this period. Covenants
are calculated on a rolling 12-month basis each quarter and therefore for all
quarters until Q4 of FY23, and Q1 of FY24, a portion of the EBITDA/EBITA has
already been earned, reducing the risk of a potential breach. Taking this into
account along with the forecasts reviewed, it is considered that the EBITA/net
interest covenant for the rolling 12 months to Q4 of FY23 and Q1 to Q2 of FY24
is the potential limiting factor, given the Group's strong net cash position.
The Board concluded that there is sufficient liquidity headroom in the severe
but plausible downside scenario, as well as headroom on the committed
facilities and on the associated financial covenants.
Alternative performance measures
Income statement presentation - Adjusting items
To aid understanding of the underlying and overall performance of the Group,
certain amounts that the Board considers to be material or non-recurring in
size or nature or related to the accounting treatment of acquisitions are
adjusted because they are not long-term in nature and will not reflect the
long-term performance of the Group. Presenting results on this adjusted basis
is consistent with the internal reporting presented to the Board.
The directors exercise judgement in determining the classification of certain
items as adjusting using quantitative and qualitative factors. In assessing
whether an item is an adjusting item, the directors give consideration, both
individually and collectively, as to an item's size, the specific
circumstances which have led to the item arising and if the item is likely to
recur, or whether the matter forms part of a group of similar items.
The separate presentation of these items is intended to enhance understanding
of the financial performance of the Group in the particular year under review
and the extent to which results are influenced by material unusual and/or
non-recurring items. The tax impact of the above is shown in note 3 to the
financial statements on the taxation line.
Consequently, the Group is disclosing as supplementary information 'Adjusted
revenue, Adjusted profit and Adjusted earnings per share' alternative
performance measurements. These are reconciled to statutory numbers in note 3
and reported in the presentation of segmental reporting in note 4.
The Group also presents net cash/bank debt as an alternative performance
measure. The directors consider that this provides useful information about
the Group's liquidity position.
2. SIGNIFICANT AREAS OF JUDGEMENT 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 estimation and
judgement arise from the accounting for long-term contracts under IFRS 15
'Revenue from Contracts with Customers', the carrying value of goodwill, the
assumptions used in the accounting for defined benefit pension schemes under
IAS 19 'Employee benefits', the recognition of deferred tax assets in relation
to tax losses and the items classified as other items and contract
adjustments.
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 for 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, for example, the impact of pain/gain arrangements to the
extent that the amounts the Group expects to recover can be reliably estimated
and are highly probable not to reverse.
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 customers,
progress against the latest programme for completing the works, forecasts of
the costs to complete and, in certain cases, assessments of recoveries from
insurers, suppliers and contractors, where these are considered virtually
certain. Revenue is recognised to the extent that amounts forecast from
compensation events, variations and claims are agreed or considered in
management's judgement highly probable to be agreed.
There are four material contracts where management has been required to make
significant accounting estimates and, which result in estimate uncertainty, as
at 31 December 2022. In relation to these contracts, the Group has included
estimated recoveries with a combined value of £12.2m, on the basis that these
are considered highly probable not to reverse. However, there are a range of
factors which will affect the ultimate outcome once these contracts are
finalised. Management considers that the estimation uncertainty in relation
to these four contracts ranges from a potential upside of £22.6m to a
downside of £12.2m.
The ultimate financial impact of this estimation uncertainty will depend,
inter alia, on the terms of the contract and the interaction with incentive
arrangements, such as pain/gain mechanisms and bonus or KPI arrangements, as
well as final conclusions regarding claims and compensation events and
assessments of, for example, costs disallowed under the contract.
The estimates of the forecast contract outcome 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.
While management believes it has recorded positions that are highly probable
not to reverse on the basis of existing facts and circumstances, there are
uncertain factors which will impact the final contract outcome and could give
rise to material adjustments within the next financial year. Given the
inherent complexity and pervasive impact of the various judgements and
estimates impacting revenue, cost of sales and related balance sheet amounts,
it is not considered plausible to quantify the impact of taking alternative
assessments on each of these judgements.
Rectification provision: Contract in the water sector
In 2021, Costain recognised a provision of £6.2m in respect of the estimated
future costs of expected rectification works required at a customer's water
treatment facility where the Group had been prime contractor. During 2022,
working with designers, insurers and the customer, there is now greater
clarity as to the scope and cost of rectification work required, albeit a
final solution has yet to be formally agreed with all relevant parties.
As at 31 December 2022, the Group's best estimate of the cost of the single
most likely rectification solution is £17.0m, of which costs of £4.8m have
been incurred. Accordingly, a provision of £12.2m has been included in the
statement of financial position and disclosed in note 20. The work is expected
to be concluded in 2024.
Whilst the cost of rectification work is capable of being estimated, a number
of assumptions have had to be made in arriving at the cost estimate. This,
combined with the fact that the final design solution has not been finalised,
results in there being inherent estimation uncertainty in determining the
ultimate cost and associated provision. Management considers that the ultimate
cost will fall within a range of ±30% of the estimated total cost of £17m.
Costain has engaged with its insurers and received confirmation that insurance
cover is available and that all reasonable costs of rectification work that
are validly incurred will be met by insurers. Consistent with this, insurers
made an interim payment on account during 2022. On this basis, management has
made a judgement that the costs of rectification, after deduction of insurers'
excess and amounts already received from insurers, will be recovered.
Accordingly, an insurance receivable of £13.4m has been recognised in the
statement of financial position in accordance with IAS 37 on the basis that
recovery is considered virtually certain. There is a cap on insurance but the
cap is significantly in excess of the cost estimate. As at 31 December 2021,
discussions with insurers were at an early stage and the expected recovery
from insurers was not recognised as a receivable on the basis that it could
not be considered virtually certain.
Peterborough & Huntingdon
On 24 February 2022, Costain announced that it had reached a final settlement
with National Grid regarding the Peterborough & Huntingdon contract. The
settlement agreement brought an end to the dispute after the contract was
mutually terminated in June 2020 and prevents any further claims under the
contract. In 2022, Costain made a full and final payment of £43.4m to
National Grid (which was fully provided for in 2021) and recognised a £5.2m
insurance recovery. Also see note 3.
Carrying value of goodwill
Assessing the recoverability of the carrying value of goodwill recognised on
acquisition requires an estimation of the value in use of the cash generating
units to which the goodwill has been allocated. These assessments involve
estimation and judgement, principally, in respect of the levels of operating
margins, growth rates and future cash flows of the cash generating units and
also include consideration of the impact of potential sensitivities in respect
of those assumptions. The discount rates used to calculate present values and
related sensitivities are set out in note 9.
Defined benefit pension schemes
Defined benefit pension schemes require significant estimates in relation to
the assumptions for the discount rate, inflation 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 12.
Deferred tax
Included in deferred tax assets is an asset for tax losses recorded in current
and prior years. The asset is recognised on the basis that the losses will be
used against future taxable profits of the Group over the next five years. The
significant judgement in assessing the recoverability relates to the ability
of the Group to achieve its taxable profit forecasts and the ability of these
estimated numbers to withstand the application of what the Board considers
appropriate sensitivities.
Adjusting items
As described in note 1, management has used judgement to determine the items
classified as adjusting items and set out in note 3.
3. RECONCILIATION OF REPORTED REVENUE AND OPERATING PROFIT/(LOSS) TO
ADJUSTED REVENUE AND OPERATING PROFIT
Adjusted revenue, operating profit and earnings per share are presented as
non-GAAP alternative performance measurements. The Board considers the
adjusted measures better reflect the underlying trading performance of the
Group for the reasons described in note 2.
The profit adjustments represent amounts included in the income statement. The
revenue adjustments represent the reversal of the contract asset recorded in
the statement of financial position immediately prior to the initial write
down and any subsequent adjustment to overall contract revenue.
Peterborough & Huntingdon
During the year, a £5.2m insurance receipt was recognised in relation to the
Peterborough & Huntingdon contract outcome.
In 2021, a £43.4m provision was recognised in relation to the full and final
settlement agreed with National Grid. Costain made a full and final payment of
£43.4m to National Grid in the first quarter of 2022. Related legal and other
costs of £4.2m were also incurred and expensed during the period ended 31
December 2021. These costs were recognised as adjusting items and therefore
the related credit has also been treated as such.
Other items
During the year, Costain has embarked on a Transformation programme to deliver
operational efficiencies. In 2022, the Group incurred £5.0m (2021: £nil) of
restructuring costs and £0.7m (2021: £nil) of reorganisation costs.
During the year, the Group sold a minor stake in a hotel company for £0.5m.
The investment was impaired to nil in 2020 reflecting the significant impact
of COVID-19 in that sector, so the profit realised this year is also £0.5m.
This cost was recognised as an adjusting item and therefore the related profit
has also been treated as such.
During the year, the Group fully impaired tunnel boring machines held at net
book value of £1.4m which were outmoded and no longer core to operations.
In 2022, the Group incurred £nil (2021: £0.4m) amortisation on acquired
intangibles as these are now carried at net book value £nil.
In 2021, the Group also recognised a profit of £8.4m on the A465 Heads of the
Valley Road contract as a result of lower costs to complete than forecast at
the end of 2020 when a write down to the contract asset was recognised.
Year ended 31 December 2022 Adjusted P&H Other items Total
£m £m £m £m
Revenue before contract adjustments 1,421.4 - - 1,421.4
Contract adjustments - - - -
Revenue 1,421.4 - - 1,421.4
Cost of sales (1,328.7) - - (1,328.7)
Gross profit 92.7 - - 92.7
Administrative expenses before other items (56.4) - - (56.4)
Other items - 5.2 (6.6) (1.4)
Administrative expenses (56.4) 5.2 (6.6) (57.8)
Operating profit/(loss) 36.3 5.2 (6.6) 34.9
Share of results of joint ventures and associates - - - -
Profit/(loss) from operations 36.3 5.2 (6.6) 34.9
Net finance expense (2.1) - - (2.1)
Profit/(loss) before tax 34.2 5.2 (6.6) 32.8
Taxation (7.0) (1.0) 1.1 (6.9)
Profit/(loss) for the year attributable to equity holders of the parent 27.2 4.2 (5.5) 25.9
Basic earnings per share 9.9p 9.4p
Year ended 31 December 2021 Adjusted P&H A465 Other items Total
£m £m £m £m £m
Revenue before contract adjustments 1,178.6 - - - 1,178.6
Contract adjustments - (43.4) - - (43.4)
Revenue 1,178.6 (43.4) - - 1,135.2
Cost of sales (1,099.2) (4.2) 8.4 - (1,095.0)
Gross profit/(loss) 79.4 (47.6) 8.4 - 40.2
Administrative expenses before other items (49.3) - - - (49.3)
Other items - - - (0.4) (0.4)
Administrative expenses (49.3) - - (0.4) (49.7)
Operating profit/(loss) 30.1 (47.6) 8.4 (0.4) (9.5)
Share of results of joint ventures and associates - - - - -
Profit/(loss) from operations 30.1 (47.6) 8.4 (0.4) (9.5)
Net finance expense (3.8) - - - (3.8)
Profit/(loss) before tax 26.3 (47.6) 8.4 (0.4) (13.3)
Taxation 0.1 9.0 (1.6) - 7.5
Profit/(loss) for the year attributable to equity holders of the parent 26.4 (38.6) 6.8 (0.4) (5.8)
Basic earnings/(loss) per share 9.6p (2.1)p
4. OPERATING SEGMENTS
The Group has two core business segments: Transportation and Natural
Resources. 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. The segments are discussed in the Strategic Report section of
these financial statements.
The Group evaluates segment performance on the basis of profit or loss from
operations before interest and tax expense and before other items and contract
adjustments. The segment results that are reported to the Chief Executive
include items directly attributable to a segment as well as those that can be
allocated on a reasonable basis. Other items are allocated to the operating
segments where appropriate, but otherwise are viewed as Central items.
2022 Natural Central
Resources Transportation costs Total
£m £m £m £m
Segment revenue
Adjusted revenue 375.1 1,046.3 - 1,421.4
Contract adjustments - - - -
Total revenue 375.1 1,046.3 - 1,421.4
Segment profit/(loss)
Adjusted operating profit 15.0 31.5 (10.2) 36.3
Contract adjustments - - - -
Operating loss before other items 15.0 31.5 (10.2) 36.3
Share of results of joint ventures and associates - - - -
Profit/(loss) from operations before other items 15.0 31.5 (10.2) 36.3
Other items:
P&H insurance recovery 5.2 - - 5.2
Transformation costs (0.7) - (5.0) (5.7)
Tunnel boring machines impairment - (1.4) - (1.4)
Profit on disposal of other investment - - 0.5 0.5
Profit/(loss) from operations 19.5 30.1 (14.7) 34.9
Net finance expense (2.1)
Profit before tax 32.8
2021 Natural Central
Resources Transportation costs Total
£m £m £m £m
Segment revenue
Adjusted revenue 314.4 864.2 - 1,178.6
Contract adjustments (43.4) - - (43.4)
Total revenue 271.0 864.2 - 1,135.2
Segment profit/(loss)
Adjusted operating profit (2.6) 41.4 (8.7) 30.1
Contract adjustments (47.6) 8.4 - (39.2)
Operating loss before other items (50.2) 49.8 (8.7) (9.1)
Share of results of joint ventures and associates - - - -
Profit/(loss) from operations before other items (50.2) 49.8 (8.7) (9.1)
Other items:
Amortisation of acquired intangible assets (0.4) - - (0.4)
Profit/(loss) from operations (50.6) 49.8 (8.7) (9.5)
Net finance expense (3.8)
Loss before tax (13.3)
5. NET FINANCE EXPENSE
£m 2022 2021
Interest income from bank deposits 0.5 0.1
Interest income on the net assets of the defined benefit pension scheme 1.3 -
Finance income 1.8 0.1
Interest payable on interest bearing bank loans, borrowings and other similar (2.7) (3.0)
charges
Interest expense on lease liabilities (1.2) (0.9)
Finance expense (3.9) (3.9)
Net finance expense (2.1) (3.8)
Other similar charges includes arrangement and commitment fees payable.
6. TAXATION
£m 2022 2021
On profit/(loss) for the year
UK corporation tax at 19.0% (2021: 19.0%) (4.6) -
Adjustment in respect of prior years 0.3 0.1
Current tax (charge)/credit for the year (4.3) 0.1
Deferred tax (charge)/credit for the current year (2.5) 8.4
Adjustment in respect of prior years (0.1) (1.0)
Deferred tax (charge)/credit for the year (2.6) 7.4
Tax (charge)/credit in the consolidated income statement (6.9) 7.5
£m 2022 2021
Tax reconciliation
Profit/(loss) before tax 32.8 (13.3)
Taxation at 19.0% (2021: 19.0%) (6.2) 2.5
Amounts qualifying for tax relief and disallowed expenses (1.0) (0.3)
Rate adjustment relating to deferred taxation and overseas profits and losses 0.1 6.2
Adjustments in respect of prior years 0.2 (0.9)
Tax (charge)/credit in the consolidated income statement (6.9) 7.5
7. EARNINGS/(LOSS) PER SHARE
The calculation of earnings/(loss) per share is based on profit of £25.9m
(2021: loss of £5.8m) and the number of shares set out below.
2022 2021
Number Number
(millions) (millions)
Weighted average number of ordinary shares in issue for basic earnings per 275.0 274.9
share calculation
Dilutive potential ordinary shares arising from employee share schemes 1.7 5.1
Weighted average number of ordinary shares in issue for diluted earnings per 276.7 280.0
share calculation
8. DIVIDENDS
No dividends were paid or proposed in respect of the year ended 31 December
2022.
9. INTANGIBLE ASSETS
Goodwill Customer relationships Other acquired intangibles Other intangibles Total
£m £m £m £m £m
Cost
At 1 January 2021 54.1 15.4 9.7 14.4 93.6
Additions - - - 1.5 1.5
At 31 December 2021 54.1 15.4 9.7 15.9 95.1
At 1 January 2022 54.1 15.4 9.7 15.9 95.1
Additions - - - 0.3 0.3
At 31 December 2022 54.1 15.4 9.7 16.2 95.4
Accumulated amortisation
At 1 January 2021 9.0 15.0 9.7 7.8 41.5
Charge in year - 0.4 - 0.7 1.1
At 31 December 2021 9.0 15.4 9.7 8.5 42.6
At 1 January 2022 9.0 15.4 9.7 8.5 42.6
Charge in year - - - 0.6 0.6
At 31 December 2022 9.0 15.4 9.7 9.1 43.2
Net book value
At 31 December 2022 45.1 - - 7.1 52.2
At 31 December 2021 45.1 - - 7.4 52.5
At 1 January 2021 54.1 0.4 - 6.6 52.1
Goodwill has been allocated to the applicable cash generating units of the
Transportation segment (£15.5m (2021: £15.5m)) and the Natural Resources
segment (£29.6m (2021: £29.6m)).
As described in note 2, the Group reviews the value of goodwill and in the
absence of any identified impairment risks, tests are based on internal value
in use calculations of the cash generating unit (CGU). The key assumptions for
these calculations are: operating margins, discount rates and growth rates.
Discount rates have been estimated based on pre-tax rates that reflect current
market assessments of the time value of money and the risks specific to the
CGU. The rate used to discount the forecast cash flows for both the
Transportation and Natural Resources CGUs was 15.5%. In 2021, the discount
rates used for the two CGUs were Transportation 13.2% and Natural Resources
14.3%.
The value in use calculations use the Group's four-year cash flow forecasts,
which are based on the expected revenues and profitability of each CGU, taking
into account the current level of secured and anticipated orders, extrapolated
for future years by the expected growth applicable to each CGU, as follows:
2022 2022 2021 2021
Transportation Natural Resources Transportation Natural Resources
% % % %
Growth Rates
Year 5 1.5 1.5 1.9 1.9
Long-term average 1.5 1.5 1.9 1.9
At 31 December 2022, based on the internal value in use calculations,
management concluded that the recoverable value of the Transportation cash
generating unit exceeded its carrying amount with substantial headroom.
At 31 December 2022, based on the internal value in use calculations, which
included a sensitivity aligned to a 30% reduction in absolute business unit
operating profit, management concluded that the recoverable amount of the
Natural Resources cash generating unit exceeded its carrying amount, with
headroom of £32.1m. The recoverable amount of the Natural Resources goodwill
therefore continues to be subject to further sensitivities and changes in the
value in use assessment assumptions would have resulted in the following
changes:
· An increase in the discount rate of 1.0% (from 15.5% to 16.5%
pre-tax), reduces headroom by £7.9m;
· A decrease in the long-term growth rate of 1.0% (from 1.5% to 0.5%),
reduces headroom by £5.8m; and
· A further reduction in CGU operating profit by an additional 20%, on
top of the 30% reduction already modelled, reduces headroom by £19.3m.
Based on the above sensitivities the directors consider that there is no
reasonable possible change in any key assumption that, in isolation, would
result in an impairment of goodwill. However, if the sensitivities modelled
above were to occur in combination, this would give rise to an impairment.
10. PROPERTY, PLANT AND EQUIPMENT
Right-of-use assets
Land & Buildings Plant & Equipment Land & Buildings Vehicles, plant & equipment Total
£m £m £m £m £m
Cost
At 1 January 2021 0.6 27.0 20.5 30.3 78.4
Additions - 0.7 1.0 17.0 18.7
Disposals - (0.7) (7.4) (17.9) (26.0)
At 31 December 2021 0.6 27.0 14.1 29.4 71.1
At 1 January 2022 0.6 27.0 14.1 29.4 71.1
Additions - 0.2 0.7 16.1 17.0
Disposals (0.6) (2.6) (1.4) (14.2) (18.8)
At 31 December 2022 - 24.6 13.4 31.3 69.3
Accumulated depreciation
and impairment
At 1 January 2021 0.6 19.8 8.4 9.7 38.5
Charge in year - 2.5 3.3 7.1 12.9
Disposals - (0.7) (5.6) (6.0) (12.3)
At 31 December 2021 0.6 21.6 6.1 10.8 39.1
At 1 January 2022 0.6 21.6 6.1 10.8 39.1
Charge in year - 2.9 2.1 4.9 9.9
Impairment in year - 1.4 - - 1.4
Disposals (0.6) (2.6) (0.6) (3.9) (7.7)
At 31 December 2022 - 23.3 7.6 11.8 42.7
Net book value
At 31 December 2022 - 1.3 5.8 19.5 26.6
At 31 December 2021 - 5.4 8.0 18.6 32.0
At 1 January 2021 - 7.2 12.1 20.6 39.9
11. CASH AND CASH EQUIVALENTS
Cash and cash equivalents are analysed below and include the Group's share of
cash held by joint operations of £56.5m (2021: £58.1m).
2022 2021
£m £m
Cash and cash equivalents 123.8 159.4
Borrowings - current - (7.4)
Borrowings - non-current - (32.0)
Net cash (excluding unamortised arrangement fees) 123.8 120.0
Unamortised arrangement fees - (0.6)
Net cash 123.8 119.4
12. PENSIONS
The Group operates a defined benefit pension scheme in the UK; contributions
are paid by subsidiary undertakings. There are also two defined contribution
pension schemes in place in the UK and contributions are made both by
subsidiary undertakings and employees. The total pension charge in the income
statement is £11.9m comprising £13.2m included in operating costs less
£1.3m interest income included in net finance expense (2021: £11.7m,
comprising £11.7m in operating costs and £nil interest income included in
net finance expense).
Defined benefit scheme
The defined benefit scheme was closed to new members on 31 May 2005 and from 1
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 2022 and this was updated to 31 December 2022 by a qualified
independent actuary. At 31 December 2022, there were 2,867 retirees and 2,529
deferred members (2021: 2,875 retirees and 2,629 deferred members). The
weighted average duration of the obligations is 11.9 years (2021: 16.3 years).
2022 2021 2020
£m £m £m
Present value of defined benefit obligations (527.1) (837.5) (886.5)
Fair value of scheme assets 587.3 904.6 880.9
Recognised asset/(liability) for defined benefit obligations 60.2 67.1 (5.6)
Movements in present value of defined benefit obligations
2022 2021
£m £m
At 1 January 837.5 886.5
Interest cost 14.8 11.7
Remeasurements - demographic assumptions (0.3) (5.4)
Remeasurements - financial assumptions (321.4) (16.1)
Remeasurements - experience adjustments 29.7 (6.5)
Benefits paid (33.2) (32.7)
At 31 December 527.1 837.5
Movements in fair value of scheme assets
2022 2021
£m £m
At 1 January 904.6 880.9
Interest income 16.1 11.7
Remeasurements - return on assets (310.7) 34.6
Contributions by employer 10.8 10.4
Administrative expenses (0.3) (0.3)
Benefits paid (33.2) (32.7)
At 31 December 587.3 904.6
Expense recognised in the income statement
2022 2021
£m £m
Administrative expenses paid by the pension scheme (0.3) (0.3)
Administrative expenses paid directly by the Group (1.2) (1.0)
Interest income on the net assets of the defined benefit pension scheme 1.3 -
(0.2) (1.3)
Fair value of scheme assets
2022 2021
£m £m
Global equities 109.8 137.2
Multi-asset growth funds 56.1 133.7
Multi-credit fund 110.9 118.1
LDI plus collateral 307.2 494.6
Property - 4.4
Cash 3.3 16.6
587.3 904.6
Principal actuarial assumption (expressed as weighted averages)
2022 2021
% %
Discount rate 5.00 1.80
Future pension increases 2.90 3.25
Inflation assumption 3.10 3.40
Weighted average life expectancies from age 65 as per mortality tables used to
determine benefits at 31 December 2022 and 31 December 2021 are:
2022 2021
Male Female Male Female
(years) (years) (years) (years)
Currently aged 65 21.9 23.9 22.1 24.0
Non-retirees currently aged 45 22.9 25.1 23.1 25.3
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 liability Pension cost
£m £m
Increasing the discount rate by 0.25%, decreases pension liability and 15.4 0.8
increases pension income/reduces pension cost by
Decreasing inflation by 0.25% (which decreases pensions increases), decreases 13.5 0.7
pension liability and increases pension income/reduces pension cost by
Increasing life expectancy by one year, increases pension liability and 17.9 0.9
reduces pension income/increases pension cost by
As highlighted in the table above, the defined benefit scheme exposes the
Group to actuarial risks such as longevity, interest rate, inflation and
investment risks. The LDI portfolio is designed to respond to changes in gilt
yields in a similar way to a fixed proportion of the liabilities. With the LDI
portfolio, if gilt yields fall, the value of the investments will rise to help
partially match the increase in the trustee valuation of the liabilities
arising from a fall in the gilt yield based discount rate. Similarly, if gilt
yields rise, the value of the matching asset portfolio will fall, as will the
valuation of the liabilities because of an increase in the discount rate. The
leverage within the LDI portfolio means the equivalent of 95% of the value of
the assets is sensitive to changes in interest rates and inflation and this
mitigates the equivalent movement in the liabilities of the scheme as a whole.
In 2022, long-term government bond yields increased significantly which meant
that the value of the LDI portfolio fell but the value of the liabilities also
fell by a similar amount.
In accordance with the pension regulations, a triennial actuarial review of
the Costain defined benefit pension scheme as at 31 March 2022 was started in
2022. Discussions around the results of the review are currently in progress
and the Trustee/Company have until 30 June 2023 to complete the review. The
last triennial actuarial review was completed in March 2020 and the valuation
and updated deficit recovery plan were agreed with the Scheme Trustee
resulting in cash contributions of £10.2m for each year commencing 1 April
2020 (increasing annually with inflation) until the deficit is cleared, which
would be in 2029 on the basis of the assumptions made in the 2019 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
Two defined contribution pensions are operated. The total expense relating to
these plans was £11.7m (2021: £10.4m).
13. SHARE CAPITAL
2022 2021
Number (millions) Nominal value £m Number (millions) Nominal value £m
Issued share capital
Shares in issue at beginning of year - ordinary shares of 50p each, fully paid 275.0 137.5 275.0 137.5
Issued in year (see below) 0.1 - - -
Shares in issue at end of year - ordinary shares of 50p each, fully paid 275.1 137.5 275.0 137.5
The Company's issued share capital comprised 275,084,741 ordinary shares of 50
pence each as at 31 December 2022.
All shares rank pari passu regarding entitlement to capital and dividends.
14. EVENTS AFTER THE REPORTING DATE
There are no events after the reporting date.
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