Costain's profits tumble after losing Heads of the Valleys dispute

12/12/2019
Dominic Browne

Around a half of Costain's annual profits have been wiped out after it lost a ruling in favour of the Welsh Government on the A465 Heads of the Valleys road project.

The two-year dispute between the parties was related to responsibility for design information and had been decided in Costain's favour in an initial adjudication proceeding.

Earlier this year, the Welsh Government announced the road would miss its December 2019 opening date and could cost an extra £54m to complete due to unforeseen complexities in the work.

Costain's full-year underlying profit for 2019 will now be between £17m-£19m, down from the projected £38m-£42m in its half-year trading update in June. The share price also took a tumble of around 19% following the news.

And Costain faces around £40m of cash due from the A465 scheme being withheld, leaving its year-end net cash around £20m.

In a statement, Costain said: 'The arbitration award effectively splits the responsibility for the design information between both parties. This partially reverses the decision of the initial adjudication and is contrary to the legal advice received by the Group concerning the relevant provisions of the A465 Contract.

'Costain has assessed the implications of this determination and is engaged in discussions with the Welsh Government to reach agreement on a financial settlement. We continue to fulfil our obligations under the A465 Contract, with completion scheduled in H1 2021.'

Elsewhere in the business, Costain secured around £600m of new work during the second half of 2019, and expects to finish the year with an order book of £4.2bn. It has a £1.1bn order book in respect of HS2.

Alex Vaughan, chief executive officer, commented: 'Clearly the situation regarding the A465 contract is disappointing.

'Elsewhere, the business is performing in line with expectations. We have secured a number of new contracts to maintain our healthy order book. We have also made good progress with our Leading Edge strategy, accelerating the deployment of higher margin services to our blue chip client base. We are confident this strategy will enhance our offer to clients, deliver higher margins and generate long term shareholder value.'

Mr Vaughan had embarked on a new ‘Leading Edge’ strategy for the company aimed at securing high margin contracts from across a 'blue-chip client base'.

 

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