Forging ahead in Africa

Consolidated Infrastructure defies emerging market gloom and doom.

This article was first published in the latest issue of the Moneyweb Investor. To read the magazine click here.

If you ask Raoul Gamsu, the CEO of Consolidated Infrastructure Ltd, what keeps him awake at night, his answer would be the same as it was three years ago – skills and ensuring the company has enough of them to maintain earnings growth of 20% a year.

Between 2011 and 2015 CIG more than doubled revenue to R3.6 billion, profit after tax tripled to R331 million, and headline earnings per share increased from 100c to 221c. Efforts to diversify the earnings stream are paying off and where it once operated in one sector – building materials  – it now operates in four, with power, rail and oil & gas added as new silos over the past years.

The order book across in its biggest business – power – has increased from R1.5 billion to R5 billion and 56% of profits are now generated from other countries in Africa. 

However, for some analysts this diversification – specifically into Angola – is cause for concern. “Lets get this elephant out of the room,” Gamsu said at the recent release of the company’s interim results to February.

The low oil prices and falling kwanza have resulted in a severe liquidity crisis and as a result the Angolan government has capital controls in place. This has made it difficult for investors to repatriate their kwanza-denominated earnings or pay for imports, he acknowledges.

Anecdotally one hears stories of firms packing up and leaving the country.

But CIG subsidiary company AES, which provides a waste management service to the oil and gas industry and which generates 30% of group earnings, is part of a priority industry. “It is takes up to 90 days – but we are able to remit cash when we need to,” says Gamsu.

However, to circumvent this difficulty, the company has elected to pay down its $41 million in-country debt faster than it had planned. It has also reached an agreement with its international customers (with the approval of the Angolan Central Bank) that they will pay AES 20% to 30% of their invoice outside the country. “This eliminates the risk of us paying our creditors late,” Gamsu says.

Despite the plunging oil price and the challenging macro-economic environment in Angola, AES saw profit up 24% in the last six months. The business has two tailwinds. One is that oil production volumes are rising (licence holders are contractually required to meet production targets); the other is that environmental legislation passed in December now forces the oil companies to process 100% of their drilling sludge – a service that AES performs. This mitigates against the slow-down in exploration, which accounts for 20% of revenue.

AES is a great business with two big moats around it, says Damon Buss, an industrial analyst at Electus Fund Managers. The first is there is no land available in Luanda for competitors to establish a competitive facility. And secondly, while there is land available further north, where AES has developed a new facility, possible competitors have little appetite for Africa investment, leaving AES able to consolidate its position, he says.

“AES’s profitability is not as linked to the oil price as is thought, and importantly it is annuity income as the majority of customers have signed seven year contracts,” he says.

CIL’s recent interim results show that the business is increasingly diversified – both geographically and by business stream – and this shields it from volatility.

“Our broader footprint helps us to manage risk and lumpy turnover growth,” says Gamsu. “For instance while growth in the oil producing countries of West Africa has slowed, East Africa is robust.”

CIL has structural tail-winds behind almost every one of its divisions – from power and renewable energy to rail and small power generation in the longer term, adds Buss. “Few businesses can claim this advantage currently and as a result people are starting to notice CIL.”

The bulk of revenue and profit still comes from power engineering firm Conco, which CIL acquired in 2008, and which is growing strongly.  Revenue in the first half of 2016 grew by 28% and earnings by 35%. About 40% of revenue is from South Africa, 32% from other Africa, and 28% from renewable energy. “The main Conco order book rose 35% to R5 billion providing a good pipeline for CIL,” adds Anthony Clark, small and mid-cap analyst with Vunani Securities.

Locally work from the municipalities has slowed, but work from Eskom is picking up as it focuses on transmitting power generated at Medupi and in future, Kusile. 

Similarly while round 4 of the REIPPP has been delayed, round three is well underway and Conco expects to unlock a further R700 million to R800 million in turnover as the company hits its project milestones.

Based on the success of the REIPPP programme, other African countries are intent on developing similar renewable energy programmes. “Renewable energy is making a serious difference in South Africa and we believe the opportunity on the rest of the continent is five times bigger,” says Gamsu.

Conco’s international business, which is run out of Mauritius is gaining traction as African governments and their funders recognise that infrastructure spending must continue despite the economic slowdown.

The company has won power contracts in Burkino Faso, Malawi and a $47 million contract in Ethiopia, which was originally awarded to Chinese contractors. It is backed by a government guarantee, and may be followed by a second, bigger contract.

CIG is a company that believes in investing for the long term. In the same way that it took eight years for its investment in renewable energy to bear fruit, so its rail business, Tractionel, and new power generation business GIGenCo are long-term investments.

“We are seeing an increase in rail tender activity – after a dramatic slowdown,” says Gamsu. While profits increased by 52% they still only account for 4% of group profits. “Africa’s population is set to increase from 960 million people to 1.6 billion – you cannot grow populations like that without rail.”

Similarly CIGenCo is a company with runway ahead of it. It is targeting the development of niche power generation solutions for industry or government and has five projects (three solar and two dual fuel) in the pipeline.

“The landscape on the continent is promising,” says Gamsu. “But developing these projects is arduous work requiring diligence, presence and patience.”

For the analysts that watch the company closely, CIL has a positive story to tell.  However there are one or two niggles that worry them.

One is that the share has tracked side-ways over the last year.

CIL share price over three years

 

CIL share graph

 

“The share price has not moved that much, probably because the company is small, and not that well understood,” says Buss. “Now with a R4.6 billion market cap and some significant structural tail-winds behind them, I think this is a share that fund managers – particularly those with a focus on Africa – will start to notice.”

A bigger concern is the growing order book and the working capital requirements this will place on the group. “The balance sheet is under pressure, due to the rapidly expanding order book containing larger and more working capital hungry projects,” he says.

CIL has cash on hand of R480 million and bank facilities of another R400 million.

“There is a perception that the company may have to do another capital raise and this may be holding the share price back,” adds Clark.

Three previous capital raises have been over subscribed.

Despite these worries, Clark notes that the company is trading off a PE of 11, which puts it right into the realm of well-priced growth stocks. “This is a share that every serious growth fund should own, particularly given weakness in the share price,” he says.

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