Costain Group PLC (LON:COST): Is the Market Undervaluing This Infrastructure Giant by 37%?

Costain Group PLC, a cornerstone of the UK’s infrastructure and engineering landscape, may be significantly undervalued according to a recent in-depth valuation. A two-stage Discounted Cash Flow (DCF) analysis has placed the company’s intrinsic share value at £2.28, suggesting a 37% discount compared to its current market price of £1.42.

For value-oriented investors and market analysts, this discrepancy warrants closer examination.

DCF Analysis: A Closer Look at the Methodology

The DCF model used to evaluate Costain follows a two-stage growth approach, which assumes that the company will experience an initial period of variable growth, followed by long-term stability. The forecast includes projected free cash flows (FCF) over the next decade, followed by a terminal value to account for cash flows beyond 2034.

Free Cash Flow Projections (2025–2034):

• 2025: £29.7 million
  
• 2034: £44.2 million
  
• Annual growth gradually decelerates from analyst-driven estimates to more conservative long-term rates (from approx. 6.9% to 2.3%).
  

Discounting and Terminal Value:

• A discount rate of 8.2% (reflecting Costain’s cost of equity) is used to account for time value and investment risk.
  
• The terminal value is calculated using a 2.5% perpetual growth rate, aligning with long-term UK government bond yields.
  
• Resulting terminal value: £805 million, discounted to present value: £367 million.
  
• Present value of 10-year FCFs: £254 million.
  
• Total equity value: £621 million.
  

With this equity value divided by the number of shares outstanding, the resulting intrinsic value per share is £2.28 a compelling contrast to the current market price.

Market Sentiment vs. Fundamental Value

Despite the positive long-term forecast, analyst consensus values the stock at £1.53, still significantly below the intrinsic estimate. This suggests the market may be pricing in risks that the DCF does not fully reflect, such as:

• Sector-specific cyclicality
  
• Margin pressure on long-term contracts
  
• Political and economic uncertainty in UK infrastructure policy
  

Valuation models, while informative, are inherently sensitive to assumptions about growth, discount rates, and market conditions. Small changes in any of these inputs can yield very different outcomes.

Investment Implications

For investors willing to look beyond short-term market sentiment, Costain may present an opportunity to acquire a fundamentally sound company at a material discount. If the company delivers on its projected growth trajectory and operational efficiency, the market may eventually recalibrate its valuation accordingly.

Conclusion

Costain Group PLC appears to be trading at a significant discount to its estimated fair value, offering potential upside for discerning investors. While all valuation models have limitations, the current gap between intrinsic value and market price suggests that Costain may be one of the more undervalued opportunities in the UK infrastructure sector today.