My favourite FTSE share is up 110% but still dirt cheap with a P/E of 7.7!

Costain Group (LSE: COST) is rapidly turning into my favourite FTSE share of all. It’s more than doubled in value over the last year and jumped another 4% this morning (21 August) after publishing upbeat first-half results.

The smart infrastructure specialist has given investors a bumpy ride in the past. It was swept up in the wider volatility surrounding the outsourcing sector, which sank Carillion in 2018.

Small-cap growth share

The Costain share price then crashed more than 80% in 2020 as the pandemic disrupted operations and hit profitability. But other problems were self-inflicted. Costain lost £90m following adjustments to its Peterborough & Huntingdon and A465 contracts, plus other exceptional items.

Now it’s going from strength to strength, with its shares up 110.22% over the last 12 months. I bought them on 29 November last year, and I’m personally up 60%, including dividends. It’s one of my star performers.

Costain has just posted an 8.7% increase in adjusting operating profits to £16.3m for the six months to 30 June. This was driven by an “improved performance in Transportation resulting from a better margin mix derived from our contracts, and increased volumes,” it said.

Adjusted operating margins jumped 20 basis points to 2.5%. Costain expects these to hit 3.5% in 2024 and 4.5% in 2025. They’re still wafer thin, in my view, but at least they’re getting wider (assuming it hits those targets).

First-half revenues actually fell 3.8% to £639.3m, largely due to the completion of certain projects, including the main works at Gatwick station.

Yet the group’s forward work position is now “very healthy” at £4.3bn, following contract wins across all sectors, CEO Alex Vaughan said. He was sufficiently bullish to announce a £10m share buyback, starting with immediate effect. Given that Costain’s market cap is just over £273m, that’s a relatively big deal.

Dividend income too

Costain’s revenues will always ebb and flow, depending on when it’s awarded contracts, and when it completes them. However, that bumper order book gives investors pretty good visibility on future revenues.

The group also remains vulnerable to macro forces such as the state of the economy and government finances. Money is tight, with Chancellor Rachel Reeves recently axing some infrastructure products.

Costain shares still look cheap trading at 7.75 times earnings, despite that long run. Better still, its net cash balance has grown to £166m. That’s just over 60% of its market value, which adds a layer of security.

It earns interest on that cash, which along with its profit increase helped lift adjusted earnings per share 27.3% to 5.6p. The downside is interest payments will inevitably fall as the Bank of England cuts base rates.

The forecast 1.5% yield isn’t earth shattering, but it’s still pretty good given recent share price performance. Shareholder payments are covered 9.1 times by forward earnings, giving plenty of scope for progression.

I’m happy to hold Costain in my self-invested personal pension (SIPP). I expect it to remain a favourite for some time to come.

The post My favourite FTSE share is up 110% but still dirt cheap with a P/E of 7.7! appeared first on The Motley Fool UK.

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Up 84% in a year, this value stock still looks attractive for growth and returns!

Harvey Jones has positions in Costain Group Plc. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.