Interim Results

RNS Number : 0748C

Costain Group PLC

27 August 2008

 



Costain Group PLC 

('Costain' or the 'Group')

Interim results for the half year ended 30 June 2008

Costain, the engineering and construction group, announces a strong interim performance with profit before tax up 26% and a record forward order book.

	H1 2008	H1 2007	FY 2007
Revenue*	£467.5m	£430.0m	£877.9m
Profit before tax	£10.1m	£8.0m	£19.8m
Net cash	£133.2m	£42.1m	£132.8m
Earnings per share	1.3p	1.5p**	3.6p
Dividend per share	0.25p	nil	0.5p

*  Including share of joint ventures & associates

** Restated for the bonus element of the rights issue

• Strategy delivering profitable growth by focusing on customers with long-term investment programmes 
  

• High quality record order book

• • Increased by 25% to £2.0 billion (2007: £1.6 billion)
  • Further £1 billion of preferred bidder positions (2007: £500 million)

  • £495 million of 2009 revenue secured at 30 June 2008 (2007: £416 million)
    

• Approximately £900 million of new work secured during in the six month period ended 30 June 2008 including

• • Southern Water AMP4 contract extended to 2015 

  • A14 highway development in Cambridgeshire

  • Bell Common tunnel project on the M25

  • Farringdon Station, part of Thameslink Capacity Enhancement Project and future Crossrail interchange

  • Felixstowe container port expansion

• Strong net cash position of £133.2 million (2007: £42.1 million

• Banking and bonding facilities extended to September 2011 and increased by 42% to £285.0 million

• Interim dividend of 0.25p (2007: nil) 

Commenting on the results, the Chairman, David Allvey, said:

'Following the significant recovery in performance last year, we have delivered a strong result for the first half of 2008.

'We believe that, despite the current economic environment, our targeted blue-chip customers, in particular those in the public sector and regulated industries, will continue with their investment programmes.

'Therefore, Costain, with a strong cash balance and a record order book, is in a good position to continue to deliver growth in line with our expectations.'

27 August 2008

ENQUIRIES:
Costain Group PLC	Tel: [phone]
Andrew Wyllie, Chief Executive
Tony Bickerstaff, Finance Director
Graham Read, Group Communications
College Hill	Tel: [phone]
Mark Garraway
Adam Aljewicz

CHAIRMAN'S AND CHIEF EXECUTIVE'S STATEMENT

Overview

Following the significant recovery in performance last year, this was a good start to the year with both revenue and profit up considerably on the same period last year. We also strengthened our cash position and achieved a record order book.

We have been successful in, and will continue to focus on, securing and retaining blue-chip clients in sectors with long-term investment programmes, a significant proportion of which is supported by public-sector and regulated industry spending commitments. This focused approach has ensured that the Group overall has continued to perform well.  

Results

Revenue, including the Group's share of associates and joint ventures, for the half year ended 30 June 2008 was up 9% at £467.5 million (2007: £430.0 million). Profits from operations were £7.5 million (2007: £6.6 million), an increase of 14%, whilst profit before tax was up 26% at £10.1 million (2007: £8.0 million). Earnings per share were 1.3 pence (2007: 1.5 pence, restated), reflecting the increase in the number of shares issued following the successful £60 million rights issue completed in October 2007.

As a result of the management actions taken last year, including raising £60 million, by way of a rights issue, and increasing the Group's banking and bonding facilities, we have been able to tender for and secure a greater number of larger contracts. This has resulted in a record order book, up 25% from the year end level. To facilitate continuing business growth, we have further enhanced our banking and bonding facilities in the first half of the year and our facilities now stand at £285 million and have been extended to 2011. 

Net cash at the period end stood at £133.2 million (2007: £42.1 million) an increase of £91.1 million, reflecting the £60 million net proceeds from the rights issue and strong cash management.

With an order book in excess of £2 billion, and a further £1 billion in preferred bidder positions, the Group has already secured almost £500 million of revenue for 2009.  

Dividend

In line with the Board's commitment to a progressive dividend policy following the return to the dividend list with the payment of 0.5 pence per share for the year ended 31 December 2007, the Board has declared a 2008 interim dividend of 0.25 pence per share. The dividend, which reflects both the Group's improved performance and the Board's confidence in the future, will be paid on 31 October 2008 to those shareholders on the register as at 26 September 2008. 

Pension

The Group's legacy defined benefit pension scheme deficit as at 30 June 2008 was £48.4 million net of deferred tax, an increase of £12.0 million from the position as at 31 December 2007. The increase reflects the downturn in the world's equity markets since the beginning of the year.  The assumptions and sensitivities used in the valuation of the pension scheme are set out in Note 7 to the interim financial statements.

In line with our previously announced policy, an additional cash payment of £1.6 million, matching the interim dividend payment, will be made to the scheme.

Operations 

Civil Engineering

The Group's Civil Engineering division, which accounts for over 80% of the Group's order book, includes the Infrastructure (Highways, Airports, Rail and Nuclear) and Environment (Water, Waste and Marine) activities.

Revenue during the period was £280.4 million (2007: £280.4 million), with a profit from operations of £11.8 million (2007: £10.1 million).  

Whilst revenues were at the same level as last year, operating profits were significantly improved reflecting an excellent performance in markets where Costain has strong positions and where we secured a higher number of project bonuses than last year for contracts completed ahead of schedule.  This also resulted in strong margin improvement where we continued to record an upper quartile industry performance.  

The division's order book was up 40% on the year end level following a number of excellent contract awards during the period, including a number with repeat order blue chip customers.  

In Environment, our Water operations, as a 40% member of the 4D consortium, scored a major success when it won a five-year extension to its AMP4 contract for Southern Water which gives the Group early visibility of a major earnings stream from 2010 through to 2015. In Waste, we are preferred bidder for a major scheme at Manchester and, post the period end, were awarded the £120 million contract at Riverside Belvedere. The Marine operation meanwhile was awarded the contract by Hutchison Ports UK for an enlarged container terminal at Felixstowe. .

In Infrastructure, our Highways activity got off to a strong start to the year with the awards of major contracts for the Bell Common tunnel project on the M25 and, in joint venture, the A14 in Cambridgeshire. In Rail, we secured an advance works contract at Farringdon Station as part of the Thameslink Capacity Enhancement Project in north London which, following Royal Assent for the Crossrail project, gains increased significance with Farringdon nominated as a Crossrail interchange.  

Having earlier this year been appointed to the BAA Complex Building Integrator Framework, our Airports operation secured initial advisory work at London Gatwick airport. Meanwhile, in Nuclear, we made progress in building a leading position in the decommissioning market, particularly at Sellafield which accounts for the majority of the UK's nuclear decommissioning programme.

Building

Revenue during the period was £146.9 million (2007: £108.5 million).  The net loss of £2.6 million (2007: loss of £0.4 million) is the result of provisions made for additional costs on one specific non-core residential project.

In line with our stated strategy of actively trading our PFI portfolio in order to invest in future opportunities, we disposed of our equity stake in the Kent Education Partnership concession, in the period, for a profit of £1.6 million and in line with the last Directors' valuation. 

Aside from the residential project referred to above, the division would otherwise have generated a small net profit and has a good positive cash position.  

Costain Oil, Gas & Process ('COGAP')

COGAP had a very good first half with a profit from operations for the first six months of £1.8 million (2007: £0.2 million) on revenue of £37.2 million (2007: £26.2 million). As a result of its refocused strategy and the remedial actions taken over the last two years, margins are approaching the targeted 5% level and have the potential to grow further on the back of an excellent order book.   

Excellent examples of the quality of work being secured by the division are the additional orders from E.ON and Gaz de France for the engineering and project management services for their major underground gas storage projects in Cheshire.

Good progress has been made in the year on the Pemex contract in Mexico and the plant is now in the final commissioning phase.

Land Development

With, as expected, no land transactions during the period, revenue for the period was £0.6 million (2007: £1.9 million) with a loss after tax of £0.6 million (2007: loss of £0.5 million). The loss in the period reflects running costs similar to those in the prior period.

As has been widely reported, the Spanish property market has become more difficult. Whilst we continue to pursue a major land transaction, due to the prevailing market conditions, we do not currently expect this to be completed by the end of the year. 

Meanwhile, construction has now commenced on the Group's 30-year marina concession adjacent to Gibraltar with initial income expected during the first half of 2010.  The Group's share of the equity investment in this significant project, which includes 798 berths, dry-dock facilities and commercial property development opportunities, is €7.5 million over the next two years. 

International

Following the decision in 2006 to close the International division, we are near to completing the remaining contracts, in particular Costa Azul where the facility is now operational and, whilst final minor works are being completed, commercial negotiations regarding the final account are ongoing.  

Management

In order to further align our organisation with our target customers, we have streamlined the operational management team to four Managing Directors, each with responsibility for a contracting division. In addition Alan Kay has been appointed as Chief Operating Officer with a specific remit to enhance our contract winning processes, project resourcing, technical excellence and operational delivery across the Group.

Risks and uncertainties

The Board continuously assesses and monitors the key risks of the business. Despite the current uncertainty in the global economy, the key risks that could affect the Group's medium term performance, and the factors which mitigate these risks, have not significantly changed from those set out on pages 22 to 24 of the Group's Annual Report for 2007, a copy of which is available from our website www.costain.com.

The Business Review and the notes to these interim financial statements include consideration of uncertainties affecting the Group in the remaining six months of the year.

Outlook

Following the significant recovery in performance last year, we have delivered a strong result for the first half of 2008.

We believe that, despite the current economic environment, our targeted blue-chip customers, in particular those in the public sector and regulated industries, will continue with their investment programmes.

Therefore, Costain, with a strong cash balance and a record order book, is in a good position to continue to deliver growth in line with our expectations.

DAVID ALLVEY

Chairman

ANDREW WYLLIE

Chief Executive

27 August 2008

Condensed consolidated income statement

Half-year ended 30 June, year ended 31 December			2008		2007		2007
			Half-year		Half-year		Year
	Notes		£m		£m		£m
Revenue (Group and share of joint ventures and associates)	3		467.5		430.0		877.9
Share of joint ventures and associates			(45.3)		(77.7)		(130.3)
Group revenue			422.2		352.3		747.6
Cost of sales			(403.2)		(337.9)		(716.2)
Gross profit			19.0		14.4		31.4
Administrative expenses			(12.2)		(10.8)		(21.7)
Group operating profit			6.8		3.6		9.7
Profit on sale of investment			-		2.7		2.7
Profit on sales of interests in joint ventures and associates			1.6		0.2		3.2
Share of results of joint ventures and associates	3		(0.9)		0.1		0.9
Profit from operations	3		7.5		6.6		16.5
Financial income	4		17.5		14.5		29.6
Finance costs	4		(14.9)		(13.1)		(26.3)
Net financing income			2.6		1.4		3.3
Profit before tax			10.1		8.0		19.8
Income tax expense			(2.2)		(1.8)		(3.8)
Profit for the period attributable to equity holders of the parent	3		7.9		6.2		16.0
Earnings per share - basic*	5		1.3p		1.5p		3.6p
Earnings per share - diluted*	5		1.2p		1.5p		3.5p

* (2007 half-year figures restated - see note 5)

The impact on the results of the businesses disposed was not material and, therefore, all results are classified as arising from continuing operations.

Condensed consolidated statement of recognised income and expense

Half-year ended 30 June, year ended 31 December	2008 Half-year		2007 Half-year		2007 Year
	£m		£m		£m
Exchange differences on translation of foreign operations	2.0		-		2.0
Cash flow hedges:
Effective portion of changes in fair value   (net of tax) during period - Group	-		-		(0.1)
Effective portion of changes in fair value   (net of tax) during period - joint ventures and    associates	(2.3)		5.9		0.4
Net change in fair value of cash flow hedges   transferred to profit or loss (net of tax) - joint ventures   and associates	(0.4)		-		(0.5)
Change in fair value of assets classified as available for sale	-		(2.6)		(2.6)
Actuarial (losses)/gains on defined benefit pension scheme	(20.8)		27.8		11.7
Tax recognised on actuarial losses/(gains) recognised directly in equity	5.8		(7.8)		(3.3)
Tax rate adjustment to brought forward actuarial losses recognised directly in equity	-		(1.7)		(1.7)
Net (expense)/income recognised directly in equity	(15.7)		21.6		5.9
Profit for the period	7.9		6.2		16.0
Total recognised income and expense for the period attributable to equity holders of the parent	(7.8)		27.8		21.9

Condensed consolidated balance sheet 

Half-year ended 30 June, year ended 31 December	Notes		2008 Half-year		2007 Half-year		2007 Year
			£m		£m		£m
Assets
Non-current assets
Property, plant & equipment	6		7.4		4.4		3.5
Intangible assets	6		2.3		3.1		2.7
Investments in joint ventures			30.7		28.0		29.0
Investments in associates			1.7		2.9		2.2
Loans to joint ventures			10.8		4.3		7.3
Loans to associates			1.0		1.2		1.6
Other receivables			6.5		6.2		6.7
Deferred tax assets			24.8		18.4		21.2
Total non-current assets			85.2		68.5		74.2
Current assets
Inventories			4.1		1.7		2.0
Trade and other receivables			158.4		146.0		150.3
Cash and cash equivalents			133.5		42.9		133.4
Total current assets			296.0		190.6		285.7
Total assets			381.2		259.1		359.9
Equity
Share capital			31.6		17.9		31.4
Share premium			1.6		0.6		1.1
Special reserve			-		12.8		-
Foreign currency translation reserve			2.9		(1.2)		0.9
Hedging reserve			(4.5)		4.4		(1.8)
Retained earnings			(14.0)		(61.7)		(4.2)
Total equity attributable to equity holders of the parent	8		17.6		(27.2)		27.4
Liabilities
Non-current liabilities
Retirement benefit obligations	7		67.2		38.4		50.6
Other payables			3.3		3.2		3.7
Provisions			8.1		3.4		5.0
Total non-current liabilities			78.6		45.0		59.3
Current liabilities
Trade and other payables			279.6		233.6		268.1
Tax liabilities			1.7		1.8		1.8
Overdrafts			-		0.5		-
Interest bearing loans and borrowings			0.3		0.3		0.6
Provisions			3.4		5.1		2.7
Total current liabilities			285.0		241.3		273.2
Total liabilities			363.6		286.3		332.5
Total equity and liabilities			381.2		259.1		359.9

Condensed consolidated cash flow statement 

Half-year ended 30 June, year ended 31 December		2008 Half-year		2007 Half-year		2007 Year
		£m		£m		£m
Cash flows from operating activities
Profit for the period		7.9		6.2		16.0
Adjustments for:
Depreciation and amortisation		1.3		1.1		2.8
Financial income		(17.5)		(14.5)		(29.6)
Finance costs		14.9		13.1		26.3
Share-based payments expense		0.7		0.2		0.2
Income tax		2.2		1.8		3.8
Profit on sale of investment		-		(2.7)		(2.7)
Profit on sales of interests in joint ventures and associates		(1.6)		(0.2)		(3.2)
Share of results of joint ventures and associates		0.9		(0.1)		(0.9)
Cash generated by operations before changes in working capital and provisions		8.8		4.9		12.7
(Increase)/decrease in inventories		(2.1)		0.7		0.4
(Increase)/decrease in receivables		(7.0)		18.4		13.3
Increase/(decrease) in payables		10.7		(32.5)		1.9
Movement in provisions and employee benefits		(3.8)		(6.1)		(8.0)
Cash generated/(used) by operations		6.6		(14.6)		20.3
Interest paid		(0.2)		(0.1)		(0.5)
Income taxes paid		-		-		(0.3)
Net cash generated/(used) by operating activities		6.4		(14.7)		19.5
Cash flows from investing activities
Interest received		2.5		1.2		2.8
Additions to property, plant & equipment		(4.8)		(0.2)		(0.8)
Additions to intangible assets		-		(0.1)		(0.2)
Additions to investments		-		-		(0.2)
Disposal of subsidiary, net of cash disposed		-		(1.4)		(1.4)
Proceeds from sale of investment and interests in joint ventures and associates		5.0		3.7		9.4
Loans to joint ventures and associates		(6.2)		(0.2)		(10.5)
Repayment of loans from joint ventures and associates		-		0.5		0.4
Net cash (used in)/from investing activities		(3.5)		3.5		(0.5)
Cash flows from financing activities
Issue of ordinary share capital		0.6		-		65.0
Share issue costs		-		-		(4.5)
Dividends paid		(3.1)		-		-
Payment of borrowings		(0.3)		-		(1.0)
Payment of finance lease liabilities		-		(1.4)		(0.1)
Net cash (used in)/from financing activities		(2.8)		(1.4)		59.4
Net increase/(decrease) in cash and cash equivalents		0.1		(12.6)		78.4
Cash and cash equivalents at beginning of period		133.4		55.0		55.0
Effect of foreign exchange rate changes		-		-		-
Cash and cash equivalents at end of period		133.5		42.4		133.4

Notes to the interim financial statements

    1.    General information

Costain Group PLC (the Company) is a public limited company incorporated in the United Kingdom. The address of its registered office and principal place of business is Costain House, Vanwall Business Park, Maidenhead, Berkshire SL6 4UB.  

The condensed consolidated interim financial statements are presented in pounds sterling, rounded to the nearest hundred thousand.

The comparative figures for the financial year ended 31 December 2007 are not the Company's full statutory accounts for that financial year. Those accounts have been reported on by the Company's auditors and delivered to the Registrar of Companies. The report of the auditors was (i) unqualified, (ii) did not include a reference to any matters to which the auditors drew attention by way of emphasis without qualifying their report, and (iii) did not contain a statement under section 237(2) or (3) of the Companies Act 1985.    

    2.    Statement of compliance

This interim financial information for the half-year ended 30 June 2008 has been prepared in accordance with IAS 34 Interim Financial Reporting as adopted by the European Union and with the Disclosure and Transparency Rules of the Financial Services Authority. The interim financial information should be read in conjunction with the Annual Report for the year ended 31 December 2007.

As required by the Disclosure and Transparency Rules of the Financial Services Authority the accounting policies and presentation applied in this condensed set of financial statements are consistent with those described in the Annual Report for the year ended 31 December 2007.

The Board approved the unaudited interim financial statements on 26 August 2008.

The Group's principal risks and uncertainties are consistent with those noted in the Annual Report for the year ended 31 December 2007. Judgements made by management in the application of Adopted IFRS that have significant effect on the financial statements and estimates with a significant risk of material adjustment in the next year are discussed in note 10. 

    3.    Business and geographical segment information by origin

In the opinion of the directors, the business segments are Civil Engineering, Building, Oil, Gas & Process and International, which undertake engineering and construction projects, Property Development operations in Spain and Central costs. These represent the Group's primary segments. Secondary segments are presented geographically.

Half-year ended 30 June 2008	Civil Engineering	Building	Oil, Gas & Process	International	Property Development	Central costs	Total
	£m	£m	£m	£m	£m	£m	£m
Group revenue	242.6	143.8	35.2	0.6	-	-	422.2
Share of revenue of JVs and associates	37.8	3.1	2.0	1.8	0.6	-	45.3
Total revenue	280.4	146.9	37.2	2.4	0.6	-	467.5
Group operating   profit/(loss)	12.3	(4.4)	1.8	-	-	(2.9)	6.8
Profit on sale of   associate	-	1.6	-	-	-	-	1.6
Share of results of JVs and associates	(0.5)	0.2	-	-	(0.6)	-	(0.9)
Segment result	11.8	(2.6)	1.8	-	(0.6)	(2.9)	7.5
Net financing income							2.6
Income tax expense							(2.2)
Profit for the period							7.9

Half-year ended 30 June 2007	Civil Engineering	Building	Oil, Gas & Process	International	Property Development	Central Costs	Total
	£m	£m	£m	£m	£m	£m	£m
Group revenue	223.6	104.3	22.1	2.3	-	-	352.3
Share of revenue of JVs and associates	56.8	4.2	4.1	10.7	1.9	-	77.7
Total revenue	280.4	108.5	26.2	13.0	1.9	-	430.0
Group operating profit /(loss)	9.9	(3.3)	-	(0.2)	-	(2.8)	3.6
Profit on sale of investment	-	2.7	-	-	-	-	2.7
Profit on sale of associate	-	-	-	0.2	-	-	0.2
Share of results of JVs and associates	0.2	0.2	0.2	-	(0.5)	-	0.1
Segment result	10.1	(0.4)	0.2	-	(0.5)	(2.8)	6.6
Net financing income							1.4
Income tax expense							(1.8)
Profit for the period							6.2

Year ended 31 December 2007	Civil Engineering	Building	Oil, Gas & Process	International	Property Development	Central costs	Total
	£m	£m	£m	£m	£m	£m	£m
Group revenue	441.4	249.7	53.8	2.7	-	-	747.6
Share of revenue of JVs and associates	97.9	5.0	8.5	15.3	3.6	-	130.3
Total revenue	539.3	254.7	62.3	18.0	3.6	-	877.9
Group operating   profit /(loss)	16.9	(2.3)	1.7	(0.2)	-	(6.4)	9.7
Profit on sale of   investment	-	2.7	-	-	-	-	2.7
Profit on sale of JVs    and associates	3.0	-	-	0.2	-	-	3.2
Share of results of JVs   and associates	0.1	0.4	0.2	-	0.2	-	0.9
Segment result	20.0	0.8	1.9	-	0.2	(6.4)	16.5
Net financing income							3.3
Income tax expense							(3.8)
Profit for the year							16.0

		Revenue				Segment result
		2008 Half-year	2007 Half-year	2007 Year		2008 Half-year	2007 Half-year	2007 Year
		£m	£m	£m		£m	£m	£m
United Kingdom		463.1	405.7	833.8		8.1	7.2	16.3
Spain		0.6	1.9	3.6		(0.6)	(0.5)	0.2
Rest of the world		3.8	22.4	40.5		-	(0.1)	-
Total revenue		467.5	430.0	877.9		7.5	6.6	16.5
Share of revenue of JVs   and associates		(45.3)	(77.7)	(130.3)
Group revenue		422.2	352.3	747.6

During the 6 months to 30 June 2008, the Group sold its interest in its associate, Kent Education Partnership Ltd, for a net cash consideration of £5.0 million generating a profit on disposal of £1.6 million.

During 2007, the Group sold its investment in Bridgend Custodial Services Ltd and its interest in the joint venture, Sirhowy Enterprise Way (Holdings) Ltd, for a net aggregate cash consideration of £8.4 million, generating profits on disposal of £2.7 million and £3.0 million respectively. The Group also disposed of its interests in Nigeria. These comprised the Group's associate Costain (West Africa) Plc, sold for a net cash consideration of £1.0 million generating a profit after costs of sale of £0.2 million and the Group's subsidiary undertaking, Richard Costain Construction & Engineering Ltd. The consideration for this subsidiary undertaking was £nil and the net assets at the date of sale were property, plant & equipment £0.9 million, trade and other receivables £0.7 million, cash and cash equivalents £1.4 million and trade and other payables (£3.0 million).

         4.   Net financing income/(costs)

Financial income includes the expected return on the assets of the pension scheme of £14.1 million (2007 half-year £13.4 million, 2007 year £26.7 million) and finance costs include the expected increase in the present value of the pension scheme liabilities of £14.7 million (2007 half-year £12.9 million, 2007 year £25.8 million). The expected return and the increase in present value are based on the value of assets and liabilities of the pension scheme at the start of the period. 

         5.    Earnings per share

         The calculation of earnings per share is based on profit for the period of £7.9 million (2007 half-year £6.2 million, 2007  

         year £16.0 million) and the number of shares set out below:

	2008 Half-year		2007 Half-year *		2007 Year
Weighted average number of shares for basic earnings per share calculation	630,695,672		409,790,441		449,535,401
Dilutive potential ordinary shares:
SAYE Scheme	1,909,649		6,622,009		5,404,067
Weighted average number of shares for fully diluted earnings per share calculation	632,605,321		416,412,450		454,939,468

    * The weighted average number of shares and the number of dilutive potential ordinary shares have been adjusted to take account of the bonus element of the Rights Issue and the comparative figures have been restated.

    6.    Property, plant & equipment

During the interim period, the Group spent £1.3 million on I.T. hardware upgrades (2007 half-year £0.2 million, 2007 year £0.4 million), £1.1 million on plant and machinery (2007 half-year £nil, 2007 year £0.3 million) and £2.4 million on leasehold improvements (2007 half-year £nil, 2007 year £0.1 million).  

    7.    Retirement benefit obligations

	2008 Half-year £m		2007 Half-year £m		2007 Year £m
Present value of defined benefit obligations	(496.7)		(495.0)		(511.1)
Fair value of scheme assets	429.5		456.6		460.5
Recognised liability for defined benefit obligations	(67.2)		(38.4)		(50.6)

Movements in present value of defined benefit obligations:

	2008 Half-year £m		2007 Half-year £m		2007 Year £m
At 1 January	511.1		509.4		509.4
Current service cost	2.4		3.1		5.8
Past service cost	1.3		1.3		1.2
Interest cost	14.7		12.9		25.8
Actuarial gains	(24.9)		(24.6)		(15.9)
Benefits paid	(9.8)		(9.3)		(19.5)
Contributions by members	1.9		2.2		4.3
At 31 December	496.7		495.0		511.1

Movements in fair value of scheme assets:

	2008 Half-year £m		2007 Half-year £m		2007 Year £m
At 1 January	460.5		440.7		440.7
Expected return on scheme assets	14.2		13.4		26.7
Actuarial (losses)/gains	(45.7)		3.3		(4.2)
Contributions by employer	8.4		6.3		12.5
Contributions by members	1.9		2.2		4.3
Benefits paid	(9.8)		(9.3)		(19.5)
At 31 December	429.5		456.6		460.5

  The following actuarial assumptions have been used in the IAS 19 valuations of the Group's defined benefit pension scheme (expressed as weighted averages):

	2008 Half-year  %		2007 Half-year  %		2007 Year  %
Discount rate	6.70		5.75		5.80
Expected rate of return on scheme assets	6.14		6.09		6.14
Future salary increases	4.10		3.25		3.40
Future pension increases	4.10		3.25		3.40
Inflation assumption	4.10		3.25		3.40

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 Group's defined benefit scheme:

	Pension liability
	£m
Decrease discount rate by 0.2%, increases pension liability by:	15.6
Decrease inflation (and pension increases) by 0.2%, decreases pension liability by:	(13.0)
Increase life expectancy by one year, increases pension liability by:	14.8

8.    Capital and reserves 

Issued capital as at 30 June 2008 amounted to £31.6 million (2007 half-year £17.9 million, 2007 year £31.4 million).  

Total equity	2008 Half-year £m		2007 Half-year £m		2007 Year £m
Opening balance	27.4		(55.2)		(55.2)
Total recognised income and expense for the period	(7.8)		27.8		21.9
Share-based payments	0.5		0.2		0.2
Shares issued (2008 including £0.1m via scrip dividend alternative)	0.7		-		60.5
Dividends (including £0.1m via scrip dividend alternative)	(3.2)		-		-
Closing balance	17.6		(27.2)		27.4

During the interim period, the 2007 final dividend of 0.5 pence (2006: nil pence) per share was paid to shareholders (£3.1 million in cash, £0.1 million via scrip alternative). The five-year savings contract in the Company's 2002 Save As you Earn Plan and the three-year savings contract in the Company's 2004 Save As You Earn Plan matured in December 2007. During the interim period, a total of 3,679,949 ordinary shares were allotted to employees, raising £0.6 million.

A proposed interim dividend of 0.25 pence (2007: nil pence) has not been included as a liability in these financial statements because it had not been approved at the balance sheet date. The dividend totalling 

£1.6 million will be paid on 31 October 2008 to shareholders on the register at the close of business on 26 September 2008. A scrip dividend alternative will be offered.

The Group has established a Long-Term Incentive Plan (LTIP) under which directors and senior employees can receive awards of shares subject to the Group achieving earnings per share growth targets, and Save As You Earn plans (SAYE) in which, eligible employees and executive directors are entitled to participate. Full details of these plans are disclosed in the annual financial statements.

The following grants were made during the 6 months to 30 June 2008:

Arrangement	LTIP 2008	LTIP 2008	SAYE 2008	SAYE 2008
Date of grant	21 April 2008	21 April 2008	23 May 2008	23 May 2008
Number of instruments granted	2,453,607	10,489,905	12,838,252	7,594,446
Share price at date of grant	25.0p	25.0p	24.5p	24.5p
Exercise price	nil	nil	19.6p	19.6p
Contractual life	3 Years	3 Years	3 Years	5 Years
Settlement	Shares	Cash	Shares	Shares
Fair value per granted instrument determined at the grant date	23.5p	23.5p	6.7p	7.4p

9.    Related party transactions 

There have been no significant changes in the nature of related party transactions since the last annual financial statements as at, and for the year ended, 31 December 2007.  

10.    Significant areas of judgement

The estimates and underlying assumptions 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 Group believes that the most critical accounting policies and significant areas of judgement and estimation arise from the accounting for defined benefit pension schemes under IAS 19 Employee benefits and for long-term contracts under IAS 11 Construction contracts.

Defined benefit pension schemes are accounted for in accordance with the advice of independent qualified actuaries but significant judgements are required in relation to the assumptions for inflation, future salary and pension increases, investment returns and member longevity that underpin the valuations. 

A significant amount of the Group's activities are undertaken via long-term contracts. These contracts are accounted for in accordance with IAS 11, which requires estimates to be made for contract costs and revenues. 

Management base their judgements of contract costs and revenues on the latest available information, which includes detailed contract valuations. In many cases, the results reflect the expected outcome of long-term contractual obligations, which span more than one reporting period. Contract costs and revenues are affected by a variety of uncertainties that depend on the outcome of future events and often need to be revised as events unfold and uncertainties are resolved. The estimates are updated regularly and significant changes are highlighted through established internal review procedures. The impact of the changes in accounting estimates is then reflected in the ongoing results.

The Group undertakes construction contracts that may require it to perform extra or change order work. This can result in negotiations over the extent to which the work is outside the scope of the original contract or the price for the extra work. In addition, many contracts specify the completion schedule requirements and allow liquidated damages to be charged in the event of failure to achieve that schedule; on these contracts, this could result in the Group incurring liquidated damages.

Two significant legacy contracts, in particular, represent potential risks:

Costa Azul Breakwater, Mexico (joint venture between Costain and China Harbour Engineering Company) - further progress has been made during the half-year and the final offshore works are substantially complete although there are minor rock removal works outstanding, which are weather related. The Group believes it is entitled to additional monies in respect of the works performed and commercial negotiations to this end continue and have reached an advanced stage. Judgement as to the outcome of these negotiations is required at the balance sheet date and a quantification of the probable recoveries has been made in establishing the anticipated loss on this contract. However, until the Breakwater has been handed over and the final account agreed, there will be some residual risk. The directors quantified this risk as being up to £10 million in the 31 December 2007 financial statements. Whilst this exposure remains, the directors remain confident that the current loss provisions taken on the contract are adequate.

Pemex Nitrogen Rejection Unit, Mexico - Costain is a sub-contractor on this contract, which has suffered substantial delays and cost overruns. Costain and Techint SA de CV, the main contractor, are working together towards its conclusion. Although, if either party fails to meet its respective obligations, the matter may be subject to protracted legal dispute; the directors believe appropriate provision has been made.

Responsibility Statement of the Directors in respect of the interim financial report

                        We confirm that to the best of our knowledge:

• the condensed set of financial statements has been prepared in accordance with IAS 34 Interim Financial Reporting as adopted by the EU; 

• the interim management report includes a fair review of the information required by: 

  (a)            DTR 4.2.7R of the Disclosure and Transparency Rules, being an indication of important events that have occurred during the first six months of the financial year and their impact on the condensed set of financial statements; and a description of the principal risks and uncertainties for the remaining six months of the year; and
   
  (b)            DTR 4.2.8R of the Disclosure and Transparency Rules, being related party transactions that have taken place in the first six months of the current financial year and that have materially affected the financial position or performance of the entity during that period; and any changes in the related party transactions described in the last annual report that could do so
  
  

On behalf of the Board

DAVID ALLVEY

Chairman

        ANDREW WYLLIE

        Chief Executive

        27 August 2008

INDEPENDENT REVIEW REPORT TO COSTAIN GROUP PLC

Introduction

We have been engaged by the company to review the condensed set of financial statements in the half-yearly financial report for the six months ended 30 June 2008 which comprises the Condensed Consolidated Income Statement, the Condensed Consolidated Statement of Recognised Income and Expense, the Condensed Consolidated Balance Sheet, the Condensed Consolidated Cash Flow Statement and the related explanatory notes. We have read the other information contained in the half-yearly financial report and considered whether it contains any apparent misstatements or material inconsistencies with the information in the condensed set of financial statements.

This report is made solely to the company in accordance with the terms of our engagement to assist the company in meeting the requirements of the Disclosure and Transparency Rules ('the DTR') of the UK's Financial Services Authority ('the UK FSA'). Our review has been undertaken so that we might state to the company those matters we are required to state to it in this report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the company for our review work, for this report, or for the conclusions we have reached.

Directors' responsibilities

The half-yearly financial report is the responsibility of, and has been approved by, the directors. The directors are responsible for preparing the half-yearly financial report in accordance with the DTR of the UK FSA.

The annual financial statements of the group are prepared in accordance with IFRSs as adopted by the EU. The condensed set of financial statements included in this half-yearly financial report has been prepared in accordance with IAS 34 Interim Financial Reporting as adopted by the EU.

Our responsibility

Our responsibility is to express to the company a conclusion on the condensed set of financial statements in the half-yearly financial report based on our review. 

Scope of review

We conducted our review in accordance with International Standard on Review Engagements (UK and Ireland) 2410 Review of Interim Financial Information Performed by the Independent Auditor of the Entity issued by the Auditing Practices Board for use in the UK. A review of interim financial information consists of making enquiries, primarily of persons responsible for financial and accounting matters, and applying analytical and other review procedures. A review is substantially less in scope than an audit conducted in accordance with International Standards on Auditing (UK and Ireland) and consequently does not enable us to obtain assurance that we would become aware of all significant matters that might be identified in an audit. Accordingly, we do not express an audit opinion.

Conclusion

Based on our review, nothing has come to our attention that causes us to believe that the condensed set of financial statements in the half-yearly financial report for the six months ended 30 June 2008 is not prepared, in all material respects, in accordance with IAS 34 as adopted by the EU and the DTR of the UK FSA.

KPMG Audit Plc
Chartered Accountants 
London

27 August 2008

 

END

 

 

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