Costain shares tumble 27 per cent after it issues profits warning

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The Independent Online

Shares in Costain plummeted 27 per cent yesterday after the civil engineering and construction company revealed further financial provisions running to £50m and warned pre-tax profits would be 38 per cent below market forecasts.

The company is making £36m in provisions to cover potential claims on contracts in dispute. This is in addition to the £11m signalled at the half-year stage when it racked up £20m of losses, although Costain said it would continue to "rigorously pursue" its entitlement to disputed deals.

Costain, which is 57 per cent-owned by Malaysian backers and works in areas ranging from rail to engineering, also disappointed investors by scrapping its plan to pay a dividend. The shares fell 17p to 47.25p, valuing it at £168.8m.

Analysts had forecast that full-year pre-tax profits would come in at £21.5m but cost overruns on a nitrogen-rejection plant project in Mexico and reassessments in the company's struggling building division will wipe £8m off the full-year results.

The group said the overruns would put it in breach of its banking covenants. And a further £6m provision is needed after the closure of the company's international division.

One analyst said the increase in provisions surprised the market. "They have a lot of credibility to restore now. This is poor timing and awkward for the company," he said.

However, he added that the bad news came from the oil and gas and building divisions which were peripheral businesses, while the group's core civil engineering - which accounts for 80 per cent of the company's £1.9bn forward order book - remained strong.

The chief executive, Andrew Wyllie, who joined last year, said he expected a significant improvement in the underlying performance in 2007.

"These decisions underline our commitment to take robust management action," he said, adding that all options for the future were being considered.

Rachael Waring, an analyst at Numis Securities, with a "hold" rating on the stock, said the announcement "is likely to restrain the share price over the coming months". But she added: "The business is now in a much cleaner state."