Top two for the bottom drawer
Prepaid electricity roll-out to other metros and neighbouring countries should give CIL solid revenue growth
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