Solid, in spite of appearances

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

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