Bright per­for­mance ig­nored by mar­ket

Financial Mail - Investors Monthly - - Analysis - Stafford Thomas

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.

Newspapers in English

Newspapers from South Africa

© PressReader. All rights reserved.