Re­new­ing faith in CIG

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

Financial Mail - Investors Monthly - - Front Page - AN­THONY CLARK

“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.

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