Costain Shares: Broker Sees Valuation Upside, Targets 297p

Costain’s (LON: COST) shares could have “material” re-rating potential, according to new analysis from Cavendish, which argued the stock remains undervalued despite a strong operational performance and a rapidly expanding order book.

Cavendish reiterated its Buy rating and 297p target price on the stock following the company’s FY25 results on Tuesday. Cavendish analysts said the results show a “positive start to life in the FTSE 250,” with the stock rallying close to 18% following the results.

While revenue fell 16% year over year to £1.05 billion due to previously flagged HS2 delays, the broker highlighted a 30% increase in forward work to £7 billion, with 90% of FY26 revenue already secured. That visibility, it said, underscores the case for a higher valuation.

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Costain trades on a blended 11x P/E for 2026–27, a 10% discount to peers, and a widened 35% discount on EV/EBIT at 5.0x.

Cavendish said this gap is unwarranted given the company’s exposure to high-growth verticals, including water, nuclear, aviation, and energy, alongside margin expansion supported by stronger contract quality. Water remains a standout opportunity, with industry investment set to double over the 2025-30 period.

Stronger profitability, with adjusted operating profit up 9.3% to £47.1 million, and a 75% dividend increase also bolster the investment case, the broker said. With net cash of £189.3 million and a £20 million buyback under way, Cavendish expects more capital allocation flexibility over time.

The firm concluded that Costain’s improving earnings profile, diversified order book and shareholder-focused policy give the shares “the greatest upside potential” among UK Tier 1 contractors.