Con­struc­tion space

Finweek English Edition - - INVESTMENT - Port­fo­lio Man­ager at In­vestec As­set Man­age­ment

well as its in­volve­ment in the re­new­able en­ergy space.

The sec­ond-big­gest profit contributor, at 32%, is CIG’s oil and gas op­er­a­tions. This is largely through its stake in An­gola En­vi­ron­men­tal Ser­vices (AES) – a company that pu­ri­fies the oil used as a lubri­cant when drilling oil wells. It col­lects, re­cy­cles and dis­poses of the waste and re­turns the clean oil to its client oil com­pa­nies. There is mas­sive growth po­ten­tial for ex­pand­ing this ser­vice to other coun­tries where drilling for oil and gas takes place. Stricter en­vi­ron­men­tal laws will also in­crease the im­por­tance of ser­vices like th­ese.

Look­ing ahead, the company is ac­tively look­ing into new op­por­tu­ni­ties in Nige­ria, An­gola, Mozam­bique, Ghana and the Mid­dle East. A large num­ber of its fu­ture power and elec­tri­fi­ca­tion ac­tiv­i­ties will be in the gas and re­new­able en­ergy sec­tor. CIG has also in­di­cated that it will in­crease ca­pac­ity in An­gola, ex­pand­ing AES.

Lo­cally, CIG also has a build­ing ma­te­ri­als business that sup­plies prod­ucts to de­vel­op­ers and build­ing con­trac­tors. While t his a r ea of t he business ex­pe­ri­enced a dip fol­low­ing the World Cup, through great man­age­ment and re­newed ac­tiv­ity in road and hous­ing de­vel­op­ment, it has re­cov­ered very well.

Re­cently, CIG ac­quired a business spe­cial­is­ing in the elec­trif ica­tion of rail­ways, which has very at­trac­tive growth po­ten­tial in both SA and on the rest of the con­ti­nent.

We con­tinue to be en­cour­aged by the per­for­mance of CIG – in its most re­cent f i nan­cial year, rev­enue has grown by 29%, profit in­creased by 50%, head­line earn­ings per share is up 36% and, im­por­tantly for a company in this space, the or­der book grew by 36%. Fur­ther­more, CIG has seen in­creas­ing spend from lo­cal mu­nic­i­pal­i­ties in power and elec­tri­fi­ca­tion, in their ef­forts to re­duce the coun­try’s es­ti­mated power and elec­tric­ity back­log of nearly R40bn.

Another at­trac­tive qual­ity of CIG is its rel­a­tively con­ser­va­tive man­age­ment – the work­ing cap­i­tal is very well man­aged, which is im­por­tant in a big project re­lated sec­tor such as this. The man­age­ment team has also re­cently in­creased its stake in the business to 20%, which is al­ways en­cour­ag­ing for in­vestors.

On a for­ward price-to-earn­ings (P/E) ra­tio of 11.5, CIG trades at a pre­mium to the lo­cal build­ing and con­struc­tion com­pa­nies, how­ever through its business mix and ge­o­graph­i­cal di­ver­si­fi­ca­tion it should be com­pared to an in­ter­na­tional peer group, which cur­rently trades on an av­er­age for­ward P/E of 18. We are not ex­pect­ing any div­i­dends in the short to medium term, but the company’s growth po­ten­tial more than com­pen­sates for this.

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