Top two for the bot­tom drawer

Pre­paid elec­tric­ity roll-out to other met­ros and neigh­bour­ing coun­tries should give CIL solid rev­enue growth

Financial Mail - Investors Monthly - - Front Page - AN­THONY CLARK

Two coun­ters I have con­sis­tently cov­ered since their IPOs have been Con­sol­i­dated In­fra­struc­ture Group (CIL) and An­chor Group (ACG). Both are off their best as the mar­ket, and in­vestors, sim­ply are not pre­pared to see the longer-term na­tures of the stocks, be­cause of mis­con­cep­tion or through dis­il­lu­sion­ment.

CIL, since its IPO, has not set a sin­gle foot wrong. CEO Raoul Gamsu has by strate­gic ac­qui­si­tions trans­formed an ini­tial bricks-and-ag­gre­gates busi­ness (Build­works) into a R4bn mar­ket cap in­fra­struc­ture and re­lated ser­vices busi­ness.

In 2009, at the height of the Lehman Brothers cri­sis, CIL pulled off an au­da­cious coup in buy­ing Conco for R600m. It started the trans­for­ma­tion of the com­pany. Then, in 2012, CIL ac­quired a 30% stake in a highly prof­itable near-monopoly oil en­vi­ron­men­tal ser­vices busi­ness, AES, in An­gola for R120m. It has sub­stan­tially paid for it­self as that stake is now worth more than R1,5bn and AES con­trib­utes one-third of CIL’s prof­its.

CIL’s lat­est deal is a gem of an ac­qui­si­tion. French elec­tri­cal gi­ant Sch­nei­der wanted out of its in­ter­ests in SA. The €50m busi­ness was tiny in its life; how­ever, to CIL it will be yet another sig­nif­i­cant game changer.

CIL plans to ac­quire the Sch­nei­der pre­paid elec­tri­cal me­ter busi­ness Con­log for up to R850m, fi­nanced with a R750m rights is­sue. Con­log is not work­ing-cap­i­tal in­ten­sive, and is very prof­itable. CIL is ac­quir­ing the busi­ness on a 6.5 times earn­ings mul­ti­ple.

With pre­paid elec­tric­ity me­ters rapidly be­com­ing the main means of gain­ing cus­tomer pay­ment the roll-out to other met­ros and neigh­bour­ing coun­tries should give CIL solid rev­enue and profit growth for years ahead.

But the key to this deal, one that will ap­pease the doubters on CIL, is the huge free cash that Con­log throws off. Some in­vestors have been wary of CIL, as its fast growth curve in power has ne­ces­si­tated sig­nif­i­cant work­ing cap­i­tal de­mands. This was often ac­quired via eq­uity place­ment. The Con­log deal will al­low CIL to gain a busi­ness with high mar­ket share, in­crease its rand hedge earn­ings to over 60% and bring with it a busi­ness that is highly cash and profit gen­er­a­tive.

CIL trades on a for­ward earn­ings mul­ti­ple to Au­gust of be­low 10. It does not de­serve such a lack­lus­tre rat­ing. With the counter trad­ing at its near 52-week lows and with ex­cel­lent long-term growth si­los in place, CIL is a stock I’d cer­tainly tuck away in any bot­tom-drawer pen­sion fund.

An­chor Group has had a me­te­oric rise in value since it 200c/share IPO in late 2014. The counter hit a high of R18.50 as rapid growth in as­sets un­der man­age­ment (AUM) smashed ev­ery pro-forma HEPS fore­cast.

A slew of deals us­ing An­chor’s highly rated pa­per boosted AUM since list­ing. The busi­ness bulked up its in­de­pen­dent fi­nan­cial ad­viser fo­cus and ac­quired a 47% stake in off­shore listed hedge fund Capricorn.

An­chor is now un­der the whip. So with the share price off 40% from its high and 36% in the year to date, should in­vestors be con­cerned? The an­swer is “no”. An­chor’s interim re­sults should be out by the time this ar­ti­cle is printed. The interim trad­ing up­date sug­gested growth in HEPS of over 60% year on year — good go­ing for any busi­ness, al­beit be­low what some mar­ket watch­ers were ex­pect­ing.

An­chor should have a bet­ter sec­ond half, mar­kets per­mit­ting. I also fore­see a chang­ing div­i­dend pol­icy, mak­ing An­chor an at­trac­tive in­come play along­side its J -curve growth po­ten­tial.

With plenty of cash in the war ch­est, I ex­pect fur­ther strate­gic bolt-on deals. When An­chor listed, its aim was R100bn of AUM split 50% lo­cally and 50% off­shore. With a strong base es­tab­lished I fore­see the next big deal to be off­shore.

On an earn­ings mul­ti­ple of 14, the stock is prob­a­bly now fairly priced. But that could ma­te­ri­ally change in the next fi­nan­cial year as on­go­ing AUM growth and any re­cov­ery in An­chor’s off­shore af­fil­i­ate Capricorn help earn­ings growth. I can see 150c/share for 2017 — and if a fat chunk of those earn­ings (maybe 100c/share) is paid as div­i­dends, then An­chor, at its cur­rent price, starts to look far more in­ter­est­ing.

Some in­vestors have been wary of CIL, as its fast growth curve has ne­ces­si­tated sig­nif­i­cant work­ing cap­i­tal de­mands

Newspapers in English

Newspapers from South Africa

© PressReader. All rights reserved.