Solid, in spite of ap­pear­ances

The sec­tors CIL op­er­ates in have vi­able long-term growth sce­nar­ios

Financial Mail - Investors Monthly - - Guest Column - AN­THONY CLARK

Con­sol­i­dated In­fra­struc­ture Group (CIL) — a one-time and con­sis­tent high­fly­ing dar­ling of the JSE mid-cap sec­tor — has more than halved in the past 18 months, hav­ing been sharply de-rated to a sin­gle-digit earn­ings mul­ti­ple.

You’d swear the com­pany is on the skids. But prospects re­main solid.

Un­der­ly­ing rev­enue and growth in earn­ings be­fore in­ter­est and taxes have been con­sis­tent with the recog­ni­tion of most ob­servers that the sec­tors CIL op­er­ates in — oil and gas, power in­fra­struc­ture and man­age­ment — have vi­able longterm growth sce­nar­ios.

CIL listed in 2007 as a build­ing ma­te­rial busi­ness called Build­works. In mid-2008 an au­da­cious R600m bid for pri­vately owned power in­fra­struc­ture busi­ness Conco cat­a­pulted CIL into a new busi­ness sec­tor and dra­mat­i­cally changed its out­look, as well as its rev­enue mix. This was fol­lowed by the ac­qui­si­tion of a 30.5% stake in AES, an An­gola en­vi­ron­men­tal oil and waste man­age­ment busi­ness in 2012 for $15.25m. Both ac­qui­si­tions have been highly prof­itable for CIL.

Conco had ex­ten­sive ex­per­tise in re­new­able en­ergy in­fra­struc­ture, which came in handy as govern­ment’s multi­bil­lion-rand re­new­able en­ergy in­de­pen­dent power pro­duc­ers (IPP) pro­gramme be­gan. The unit won bil­lions of rands in or­ders. It now has an or­der book in Phase 4 of R2.3bn.

But this rapid con­tract growth in a new sec­tor caused prob­lems for CIL: high work­ing cap­i­tal de­mands and a grow­ing or­der book brought about a con­stant clam­our­ing for cash. Debt fund­ing was sup­ple­mented with eq­uity place­ments, which were al­ways over­sub­scribed. But these place­ments cre­ated the per­cep­tion CIL was too cash hun­gry and might re­quire con­sis­tent fund­ing.

AES was an­other thorn in CIL’s side. A low oil price and weak An­golan econ­omy bred mis­con­cep­tions that CIL — which was mak­ing fat prof­its from its 30.5% stake in AES — could not repa­tri­ate its profit share and that a low oil price would slam prof­its. These were both false.

There were other fac­tors be­yond man­age­ment’s con­trol.

More than 65% of CIL is rand hedge and the volatile cur­rency has played havoc with trans­la­tion gains and losses. The strong rand also hurt. Then in re­cent re­sults, earn­ings di­lu­tion from a place­ment hit head­line earn­ings.

Still, the rights is­sue at R19.30/share to fund smart me­ter busi­ness Con­log in late 2016 was fully sub­scribed. Con­log brought to CIL a prof­itable and cash-gen­er­a­tive busi­ness with high mar­ket share in a grow­ing cat­e­gory.

CIL man­age­ment looks de­ter­mined to equalise its busi­ness so it is not cap­i­tal neg­a­tive. So the new fi­nan­cial year and fi­nan­cial 2018 should show a dra­matic im­prove­ment af­ter the dis­ap­point­ing in­terim earn­ings of 111c/share.

De­spite a slump in profit at AES, CIL has con­tin­ued to repa­tri­ate sig­nif­i­cant prof­its on its ac­qui­si­tion. In 2018 it could pull out $15m from AES. Un­for­tu­nately un­cer­tainty over Phase 4 of the IPP pro­gramme has put R2.3bn of or­ders on hold.

No doubt 2017 will be dif­fi­cult in term of gen­er­at­ing earn­ings, and bot­tom-line prof­its might dip as much as 20% (de­pend­ing on cur­rency move­ments) to around 200c/share, plac­ing CIL on an earn­ings mul­ti­ple of eight.

Price weak­ness has also been dic­tated by the huge sell­ing of swathes of small- to mid-cap stocks from funds un­der duress.

But over the longer term any­one bet­ting against the growth of green en­ergy and power gen­er­a­tion in Africa and the global de­mand for oil and gas must surely be a doom monger.

Re­cov­ery will come at CIL in the com­ing year. Of course, much de­pends on the cur­rency and de­vel­op­ments with the IPP. At R16.50 the worst may be over.

I’ve owned CIL through thick and thin since its list­ing. I may top up in the cur­rent weak­ness as I have the share in my re­tire­ment pen­sion fund.

The volatile cur­rency has played havoc with trans­la­tion gains and losses

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