Costain, Balfour and Renew best placed for HS2 and other rail gains

Broker Numis said on Thursday that it expects UK rail to be a key growth area for the construction sector in the foreseeable future, with phase-one of HS2 in 2020 and 2021 offsetting the completion of major rail projects from Crossrail and Thameslink.

Analysts noted that there is a further £35bn of HS2 contracts still set to be placed in 2019, including two large projects at London stations were contractors have been recently shortlisted.

Costain and Balfour Beatty were both singled out as key beneficiaries of large HS2 contract awards after the sinking of Carillion, while AIM-listed Renew Holdings "offers the greatest exposure to rail opex" in the analysts 'universe' of stocks.

The rail industry has high barriers to entry which, according to Numis, which suggest that incumbents such as these "will be the major beneficiaries of increased opex and capex workloads.

"While we expect profit margins to remain stable in this area, there are potential margin mix benefits for contractors as rail activity increases - albeit that scale of projects suggests this is unlikely to be realised until 2020/21 onwards."

Numis explains further that Costain was the largest single provider to network rail in 2016/2017 and has, along with Carillion and Balfour Beatty, provided a full range of life cycle services “across civils and buildings but also into specialist areas of track, power and M&E”, whereas the other top providers have been more niche in their contributions.

“Scope for existing players to subsume Carillion's exposure (given that Carillion was the second largest supplier to NR last year) plus positioning to win further HS2 work provides an attractive angle to the existing investment case for these companies and other existing players.”