Bright performance ignored by market

A year ago Consolidated Infrastructure Group (CIG) CEO Raoul Gamsu made a bold statement. CIG was, he said, “preparing to enter an organic growth and investment cycle that could transform the group”.

CIG is no stranger to bold transformational moves. The first came in 2008 when it acquired electrical infrastructure project specialist Consolidated Power Projects (Conco). It was the decisive factor in CIG’s exceptional growth, in the past five financial years to August, its revenue has grown by 295% and headline EPS (HEPS) by 225%.

CIG made its next decisive game-changing move in August when it announced it was to acquire full control of pre-paid electrical meter group Conlog. By far CIG’s biggest acquisition yet, Conlog came with an initial cash outlay of R700m and, based on Conlog’s 2016 results, a maximum potential price tag of R850m.

It was a big move for a company which has said it does not want excessive debt “handcuffing the business”. CIG turned to shareholders to fund the bulk of the deal through a R750m rights issue.

It went on to attract total applications of R1.57bn. “The outcome exceeded our expectations,” says Gamsu.

Conlog, founded in 1965 and once part of the Anglo American stable, has more than 10m meter units installed in 20 countries. The company says this makes it the biggest player in its industry. Conlog also supplies utilities and municipalities with services such as revenue management and protection, prepayment with smart load control and load management.

Bought on a maximum 5.3 p:e, Conlog will be immediately earnings-accretive and, says Gamsu, will add 6%-7% to group HEPS on a fully diluted basis in its first full year of consolidation. But he is looking to far bigger things from Conlog.

It has built an especially powerful position in African countries beyond SA’s borders, which now account for up to 70% of its sales. It is here that Gamsu sees a major growth opportunity. And for good reason, according to forecasts by groups such as the International Energy Agency, of growth in African household electrification. As a base, the number of African households with electricity is forecast to grow at an average of 5%/year between 2015 and 2020 from 63.6m to 82.1m.

More important for Conlog is a concerted move by power utilities to increase the number of households with prepaid meters. This is forecast to drive demand for meters at 15%/year between 2015 and 2020, a pace that requires the supply of 15m new meters.

But despite the blistering growth of CIG in the past five years and the additional growth-pusher Conlog represents, the market has relegated CIG to dog-stock status. Since peaking in October 2015, its share price has been hammered almost 40% lower and its rating reduced to a nogrowth status 8.5 p:e.

Warren Jervis, manager of Old Mutual’s Mid & Small Cap Fund, sums up the market’s view of CIG as “bizarre”.

The market is running scared of CIG’s exposure to Africa, where it derived 68% of its taxed profit in its year to August, a year in which HEPS grew 15.7%. The biggest money spinner, Conco, was responsible for 43% of taxed profit.

The market is getting the situation in the African power infrastructure market all wrong, argues Gamsu. “Surprisingly to some perhaps, but demand has remained strong,” he says. “There is, in fact, an improved outlook across many parts of Africa.”

Behind the strength lies huge foreign money, governmental and private. Not least is the US government’s Power Africa initiative, put in place in 2013 with a target of investing US$7bn over five years.