Africa projects help keep strong growth on track

Financial Mail - Investors Monthly - - Analysis - Stafford Thomas

When Con­sol­i­dated In­fra­struc­ture Group (CIG) listed in late 2007 it was a R200m an­nual rev­enue quar­ry­ing com­pany. Raoul Gamsu, CIG’s dy­namic CE, had far big­ger plans.

The trans­for­ma­tional move by Gamsu came in 2008 when CIG ac­quired elec­tri­cal in­fra­struc­ture project spe­cial­ist Con­sol­i­dated Power Projects (Conco). It was the de­ci­sive fac­tor in CIG’s ex­cep­tional growth, in which an­nual rev­enue has soared to over R4bn and head­line EPS has risen by an av­er­age of 32%/year over the past three years.

Conco’s ex­pan­sion into mar­kets out­side SA, es­pe­cially in Africa, has been vi­tal to CIG’s growth. De­spite eco­nomic head­winds in many African coun­tries Gamsu re­mains bullish on Conco, which gen­er­ates a third of its an­nual rev­enue of around R3.6bn out­side SA.

Con­tracts are rolling in for Conco, which con­trib­utes half of CIG’s taxed profit. Gamsu says: “We are busy on projects in 15 African coun­tries.”

Conco’s in­ter­na­tional or­der book, at the end of CIG’s half year to Fe­bru­ary, was R2.2bn, up from R1bn a year ear­lier.

“They are all firm orders se­cured by guar­an­teed fund­ing,” says Gamsu. “Ten­ders we have sub­mit­ted await­ing ad­ju­di­ca­tion are up from R6.9bn to R8.5bn.”

In SA, Conco is hav­ing mixed for­tunes. In its con­ven­tional power oper­a­tions the or­der book shrank from R1.7bn to R1.3bn in the 12 months to Fe­bru­ary. Gamsu at­tributes this pri­mar­ily to a lower level of con­tracts be­ing awarded in­dus­try-wide by mu­nic­i­pal­i­ties.

On a pos­i­tive note, Eskom — af­ter two years of con­strained spend­ing on its trans­mis­sion sys­tem — is again calling for ten­ders. Re­flect­ing this, Conco’s ten­ders await­ing ad­ju­di­ca­tion jumped from R2.3bn to R4bn in the 12 months to Fe­bru­ary.

Conco is mak­ing progress in SA’s re­new­able en­ergy (RE) in­fra­struc­ture space, which ac­counted for 28% of its rev­enue in the six months to Fe­bru­ary.

Conco’s RE or­der book is also strong, hav­ing more than dou­bled from R1.5bn to R3.3bn. Th­ese orders form part of round three of gov­ern­ment’s RE pro­gramme. Round four is sub­ject to de­lay but when it goes ahead it will, says Gamsu, “hold huge po­ten­tial”.

CIG is not all about Conco. In 2012 CIG made a de­ci­sive di­ver­si­fi­ca­tion move when it ac­quired a 30,5% stake in An­gola En­vi­ron­men­tal Serviços (AES), a re­cy­cler of lu­bri­cant oil used in the oil and gas drilling process.

AES is a big fac­tor in CIG’s per­for­mance and con­trib­utes al­most a third of group taxed profit. Though it has not ex­pe­ri­enced a profit fall in the wake of the oil price col­lapse, a key con­cern is CIG’s abil­ity to

re­mit div­i­dends to SA, given the US dol­lar short­age in An­gola.

This year, for the first time, CIG be­comes el­i­gi­ble un­der An­golan reg­u­la­tions to re­ceive div­i­dends. “It will be dif­fi­cult,” con­cedes Gamsu, “but in our favour, the oil in­dus­try is the big­gest for­eign ex­change earner and re­ceives pref­er­ence.”

He is acutely aware of the need to di­ver­sify CIG’s profit base. The first move in this di­rec­tion came in Novem­ber 2014 with the ac­qui­si­tion of Trac­tionel, a spe­cial­ist in rail elec­tri­fi­ca­tion projects. Its main clients are Transnet, Pas­sen­ger Rail SA (Prasa) and Metrorail.

Trac­tionel con­trib­utes 4% of group taxed profit and is not yet a ma­jor fac­tor in CIG’s for­tunes. Gamsu be­lieves this will change.

“We are still wait­ing for Transnet to start ten­der­ing for de­pots to be con­structed for its new elec­tric lo­co­mo­tives.”

CIG is on the verge of press­ing the “go” but­ton of its start-up ven­ture, CIGenCo, which will take big eq­uity stakes in small to medium-size gas and RE power plants. Its cur­rent fo­cus is on a pipe­line of five projects, three so­lar and two dual fuel.

CIG is now pre­par­ing to en­ter, as Gamsu puts it, “an or­ganic growth and in­vest­ment cy­cle that could trans­form the group”. It points to the next chap­ter of the CIG growth story which, while not with­out risks, is likely to be a re­ward­ing one for in­vestors.

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