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HS2: Costain jumps as £100bn project gets the green light

The construction firm is predicted to be a key beneficiary of the rail project alongside companies such as Balfour Beatty, Kier and Morgan Sindall

Costain - Costain to be prime beneficiary of HS2 project as approval edges closer

Shares in Maidenhead-based construction firm Costain Group PLC (LON:COST) jumped on Tuesday as it looked set to be the prime beneficiary of the High Speed 2 (HS2) railway connecting London with the North of England, which has received the green light from the government.

In a note published on Monday, analysts at Liberum said the rail line, which is planned to run from London to Birmingham and then towards cities such as Manchester and Leeds, could increase Costain’s fully diluted earnings per share (EPS) by 34% in its 2021 financial year.

Another potential beneficiary is FTSE 250 group Balfour Beatty plc (LON:BBY), which has two contracts related to HS2 worth around £2.5bn through a joint venture that are yet to be added to its order book, as well as 42% of another £1bn contract relating to the construction of the planned Old Oak Common station in West London.

The approval of HS2 could also provide some positive news for troubled contractor Kier Group PLC (LON:KIE), which over the last year has seen its share price plunge 78% following a string of profit warnings.

Liberum said Kier had secured around £1.3bn of work on the HS2 project through a joint venture with French builder Eiffage and now-defunct outsourcing group Carillion, which they expect will add £15mln in earnings for the company’s 2022 financial year.

The broker also said Kier’s contracts on the project will bring in £167mln of revenue per annum over six years.

Meanwhile, Liberum’s analysts predicted that HS2 could boost the UK’s geotechnical market by up to 30%, benefitting sector players such as Keller Group PLC (LON:KLR) which is currently bidding for three contracts associated with the project and is aiming to win at least one, which according to Liberum will be worth up to £50mln.

The broker also said Morgan Sindall Group PLC (LON:MGNS) could benefit from regeneration opportunities linked to HS2 despite having no direct exposure to the project.

Shares in Costain were 5.3% higher at 204.2p in late-morning trading, while Balfour rose 1.6% to 277.3p and Kier surged 7% to 112.8p. Keller was up 2.7% at 882p while Morgan Sindall climbed 1.7% to 1,896p.

Costs rocket to £100bn

HS2 is currently the largest infrastructure project in Europe and has attracted criticism from multiple sides of the political spectrum since it was first announced in 2012, mainly around the project’s economic benefits in relation to its ballooning costs, with the scheme now expected to set taxpayers back over £100bn, almost double initial estimates of around £56bn.

However, Prime Minister Boris Johnson has given the project his backing to make good on his promise to ‘level up’ Britain’s deprived Northern regions which backed him in December’s general election.

HS2 also forms part of a wider set of infrastructure spending plans aiming to boost Britain’s economic prosperity after Brexit.

Over the weekend, the government also began a consultation on plans to create up to 10 ‘freeports’, special economic zones that usually have lower tax and customs rates than the rest of the country, in a bid to attract business to the UK, particularly its deprived coastal areas.

The UK’s flagging steel industry is also poised to see a boon from HS2 as the project stirs up demand for more railway track, with analysts at Progressive Equity Research saying structural steelmaker Severfield PLC (LON:SFR) had an “improved outlook” following the election result as firms revived stalled construction and investment projects.

Quick facts: Costain Group

Price: 40.35 GBX

LSE:COST
Market: LSE
Market Cap: £110.94 m
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