Renewing faith in CIG

Renewable energy contracts bring some good news, but challenges remain for power player

“Conco had mismanaged two major contracts, causing R331m in losses to suddenly materialise

If embattled but slowly stabilising Consolidated Infrastructure Group (CIG) were a soap opera it would be Days of our

Lives . Just the storyline around government’s renewable energy programme phase 3.5 and 4 — worth R56bn, due to be signed two years ago — would have tested the creative talents of even the wildest scriptwriter.

You’ve had the operational farce of Eskom in the period and the “will they or won’t they sign”. The renewable energy contracts were finally signed by the energy minister at 5 pm on April 4.

How did a major player in energy infrastructure manage a business with all this going on?

CIG turned to Africa to generate business. Its key subsidiary, Conco, trumpeted its results for many years of its growing African expansion to counterbalance a weak SA. For years, Conco was a profit success, but as it got bigger and the business became more complicated, divisional management became complacent.

CIG CEO Raoul Gamsu saw that Africa bubble pop late last year. Conco had mismanaged two major contracts, causing R331m in losses to suddenly materialise. Throw in the costs of delays in renewable energy and Conco reported losses for FY2017 of R441m.

The market had no idea this was coming, and neither did the CIG executive, as much was withheld or hidden from them by a few Conco managers.

Calamitous profit warnings in September and October caused CIG’s share price to plunge.

CIG’s FY2017 headline EPS (HEPS) fell to a 77.9c/share loss from a positive 255.3c/share in FY2016, with corresponding overall profits diving from R393m to a loss of R150m. The market was in shock.

CIG, from a R19.80 share price, slumped to a low of 304c on the issues surrounding Conco and the subsequent breach of CIG’s covenants on R960m of bonds.

Apart from Conco, much of CIG was profitable, generating profits of more than R200m, and there was cash in the bank.

The Angolan oil services business AES had suffered from a low oil price and a strong rand, but its profit share to CIG was still a respectable R51m, or 24%, of group profits in 2017. Conlog, the acquired smart meter business, was profitable, as were building materials.

The signing of the renewable energy contracts has brought a 43% rally in CIG at the time of writing to 436c. CIG has gained an initial R2.4bn in orders for Conco, and the department of energy indicated that further renewable energy contracts will be forthcoming.

Impending interim results will not be pretty. Last year’s interim HEPS of 111c/share will necessitate another weak trading update. The past six months have had material costs within the business to right-size Conco; AES has felt the effects of a strong rand; and Conlog, alongside the entire sector, had a key component shortage that led to supply issues

I am not expecting any recovery in CIG in FY2018. The renewable energy works will only start to touch in the second half but more so in FY2019 and feed through into profits. With some key pressure points now eased — renewable energy, Conco and bondholders — management can get to grips with fixing the business.

For some time, the market valued Conco at even less than zero. It has a value, as does all of the divisions in CIG. Conlog has exciting prospects. AES remains highly profitable and with the oil price recovering there should be greater exploration work in Angola.

Forthcoming results will show the last net asset value of R19.56/share cut; market talk is a figure closer to R12/share with the low-ball number thrown around at R7. So at a market price of 436c — as a recovery play — CIG could be said to offer upside.