Bottom Line: Costain losses leave rivals standing

EVEN in the context of the appalling results revealed over the last month by former building giants such as Taylor Woodrow, AMEC and George Wimpey, Costain's figures look awful. The pounds 148.6m pre-tax loss is more than twice its market value and pounds 56.7m more than it made in 1988 - the peak of the building cycle. The pounds 213m attributable loss, after a pounds 56m extraordinary charge for withdrawing from US housing and minerals, is equal to the attributable profits earned in the seven years to 1990.

As with its rivals, the lion's share of the loss was due to a pounds 133.3m exceptional provision. The best that can be said about this is that the pounds 49.5m land write-down - making the total so far pounds 127m - finally brings the average plot cost down to a realistic 18 per cent of selling price. That should increase Costain's chances of getting cash out of the business by selling up to half its 2,000 plots while building on the rest.

After adjustments for the pounds 198m that will be brought in by the delayed sale of its Australian mining business, borrowings at the year end were pounds 152.5m, or 95 per cent of net assets. Since then, they have increased by a further pounds 67m, mostly because of a pounds 45m outflow from contracting. Lower workloads, coupled with the cost of modernising its US coal business to reduce costs, mean it will have to work hard to achieve its aim of cash neutrality, before disposals, in the current year.

Peter Costain, chief executive, said the full impact of the US cost-cutting will not be evident until 1995. Investors who have watched the business go through management changes and rationalisation programmes may remain sceptical until the results actually show through.

It is also promising pounds 20m of cost savings in engineering and construction to support its claim that the division's margins should be about 2 per cent in 1993. But the risks in the business are underlined by the pounds 10m cost of six 'disappointing' contracts in 1992 which, together with an pounds 8m provision against the Channel tunnel, pushed the division into a pounds 5.3m loss in 1992.

The losses wiped out distributable reserves and the final dividend was passed. The pounds 85m gain on the Australian sale means the group should return to profits in the current year, even if its debt reduction and cost-saving plans fail to achieve their targets. But the state of the balance sheet means there is unlikely be a dividend this year and possibly even next year.

The shares, down 4p at 31p, have lost more than 90 per cent of their value relative to the market over the last five years. Even so, there is far better value to be had elsewhere.