Why investors should not rely on overnight profits
Amelia Morgenrood
VERY FEW companies on the JSE trade at a price earnings ratio (P/E) of less than 10, and have a debt to equity ratio of less than 50 percent. Consolidated Infrastructure Group (CIL) is such a company, and one should ask oneself why it is punished so severely by the market, and whether it deserves to have such a low rating.
The share lost 47 percent of its value in the last 12 months and now trades at an astonishing low P/E ratio of 6.4 times.
CIL is listed in the Electrical Components & Equipment sector of the JSE main board. The company is infrastructure-focused and operates through three core reportable divisions:
1. Power and Electricity, which supplies high voltage infrastructure to the energy sector.
2. Consolidated Building Materials, which supplies heavy building materials to the construction industry.
3. Oil & Gas, which provides waste management services for the industrial and natural resources exploration sectors.
Source: Merchantec (full year 2016 results).
The company now earns approximately 60 percent of its earnings outside South Africa, and is therefore not that sensitive to the low economic growth locally.
CIL services the oil industry active off the cost of Angola, and was impacted by lower volumes in oil production due to cuts enforced by Opec.
A decline in exploration led to a cut in 11 to 12 active rigs, down to seven and the state owned oil company Sonangol are cautious with capital investment.
The recent decision of Opec to not cut production further, will normalise this situation. CIL manage all the waste products from oil drilling for the major oil businesses.
The remittance of foreign exchange remain a challenge, but most of their clients are large international oil companies and contracts are set up in a way to prevent this problem.
In October 2016 CIL acquired Conlog at a very good price – a different business from the rest of their portfolio.
It differs in the sense that it requires less capital, it is not only project based, and it generates a lot of cash.
This acquisitions changed the profile of the company and in a sense de-risked the business somewhat. Conlog designs, develops, manufactures, markets and distributes prepaid and smart electronic metering devices and solutions..
Services They provide these services to municipalities across Africa. African countries prefer prepaid options in order to secure revenue certainty, and there is a lot more growth opportunities in this region.
The acquisition of Conlog strengthened the foothold of CIL in the African electrical infrastructure market.
Last results published (6 months to February 2017).
Earnings before interest, tax, depreciation and amortisation was up 20 percent, and revenue 29 percent higher. The order book grew 25 percent and cash on hand was R548 million.
Unfortunately the Angolan associate of CIL dragged down the headline earnings per share by 18.5 percent, which was very disappointing, hence the punishment of the share price.
From an operational perspective, the decline in profits from Angola Environmental Services fell 47 percent to R33m.
CIL sustained its impressive top-line growth for the first six months of the 2017 financial year, but profits were not able to keep up as a result of tougher trading conditions in Angola, a stronger rand over the period, and higher financing costs.
Prospects for the company
Looking forward the Angolan business will probably normalise and the impact of the lower oil price, foreign exchange fluctuations and the dilution due to the rights issue to pay for Conlog, will diminish.
This is a business whose main division is experiencing growth and a balance sheet that is very healthy, and the less-than-seven times earnings ratio seem crazy.
The chief executive of CIL, Raoul Gamsu, remains confident of the group’s focus on the Middle East and Africa (MEA), and its continued move into international markets.
In his own words: “The MEA region presents a wealth of opportunity, given the upward trend in renewable energy projects and continued demand for and funding of electricity grid infrastructure.
“Capitalising on the robust energy markets in Africa… the group markedly advanced its strategic objective to expand across Africa. The (interim) period also saw CIL bed down its acquisition of Conlog – a prepaid electricity metering and services provider – and start to reap the benefits of synergies,” Gamsu said.
At the current share price of 1 478 cents, I feel that CIL is significant undervalued and present an opportunity.
Keep in mind that this is a small company which may present risk. Small companies can be immensely influenced by unforeseen factors.
Investors in small companies should be willing to stomach big swings in share prices.
Shares are long-term investments and investors should not rely on overnight profits. When the share price was 2 000c, we also felt that it was undervalued…
Amelia is a regional director of PSG, a certified financial planner, a member of the South African Institute of Stockbrokers and the Investment Analyst Society.