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The trading update from hell

What happened to Consolidated Infrastructure Group?

In one of the worst trading updates in recent memory, Consolidated Infrastructure Group provided its third update for the financial year ending August on Tuesday that triggered a virtual collapse in its share price.

After the carnage was over, the share price had closed 57% lower at R3.40 a share than where it had started the day.

 

CIL: 10 largest shareholders as at October 27

No of shares held

Percentage owned

1

PINECOURT INTERNATIONAL LTD

28 705 392

14.2%

2

NALA EMPOWERMENT INV CO. (PTY) LTD

15 060 112

7.5%

3

CITICLIENT NOMINEES NO 8 NY GW

6 921 232

3.4%

4

BERKELEY PRIVATE WEALTH LTD

6 871 385

3.4%

5

MELNICK SEAN ALAN

6 634 580

3.3%

6

OLD MUTUAL LIFE ASSURANCE CO SA LTD

6 182 357

3.1%

7

MELNICK LINDY SUE

5 064 504

2.5%

8

PEREGRINE EQUITY CC-SENTINEL RF- PLEDGE ACCOUNT

5 064 428

2.5%

9

YONBOR NOMINEES PTY LTD GLOBAL CAPI

4 777 616

2.4%

10

PEREGRINE EQUITIES (PTY) LTD

4 433 130

2.2%

Source: Strate

The pain will be felt far and wide. Business CEO Raoul Gamsu has attracted a pedigreed and diverse set of shareholders. And with its largest subsidiary, Conco, operating in the infrastructure space, it was also a very capital-thirsty business which, up until yesterday, attracted an impressive set of shareholders that viewed management as capable and honest.

The company counted such business luminaries as Sean Melnick, in his personal capacity, as one of its largest shareholders. But virtually all of the banks and asset managers were shareholders including Peregrine, Investec Bank and Asset Management, Old Mutual, Liberty, Standard Chartered, Absa, MMI, and the proprietary trading books of both Standard Bank and RMB. The company even counted a charity – the Jewish Helping Hands, as one of its largest shareholders.

So, what on earth happened?

The first update on August 31, indicated that headline earnings per share would be between 25% and 35% lower compared to the prior year. “This was a bit less than we expected but in the ballpark,” said Keith McLachlan, a portfolio manager at AlphaWealth whose fund held shares in the company. “The reasons for the decline were largely due to the macro environment: a strong rand counted against them while the company was expected to start work on Independent Power Producer projects related to South Africa’s renewable energy programme. Due to delays in decision making, contracts had not been signed and the work had not materialised. At the same time, the company’s oil services subsidiary in Angola was experiencing a slowdown in activity.”

Read: Signing renewable IPPs by October not that simple

In the statement, the company indicated that it would publish results on November 8. This did not happen. Instead, the company published a second trading update, indicating that earnings would now be between 50% and 55% lower and the results would be published on November 15. “This is when we started to more aggressively take risk off the table. They delayed the results, and without stating why, were now telling us earnings would be lower than initially expected. So why did they then publish the first update? We began cutting our positions following that second update.”

Fast forward to November 14. The company publishes what will be its third (and hopefully final) update in which it refers to a board meeting that had taken place the day before and a number of issues relating to profit and loss recognition over its multi-year contracts that had been raised. The statement also alludes to issues around being paid, cost overruns, and lower than expected revenue due to “uncharacteristically poor execution”. It concludes by saying that earnings will be “at least” 55% lower than previously reported and the results would be published no later than November 30.

“They were telling us they didn’t know what the earnings are going to be,” says McLachlan. “I interpreted cost overruns and unrecoverable amounts to indicate the possibility of write-downs and impairments. But what was abundantly clear was that the decline in earnings was no longer just due to macro factors, the issues were greater than this and due to own-goals by management. We consistently communicate to our investors that we only hold quality companies, so when it became apparent that we could no longer justify holding CIL, we made a decision to get out and we sold our remaining position. It has been my experience that in these situations with these sorts of businesses, things can easily get worse.”

And it might well get far worse. McLachlan pointed out that without earnings, reporting losses could raise secondary risks that talk to the company’s liquidity, solvency and its capital structure. There also appear to be issues surrounding the accounting of contracts on the percentage completion basis that the company and its auditors need to address. But the deepest cut is to management’s credibility. Once lauded, they are now going to have to undertake the slow, deliberate process of rebuilding investors’ trust. If they survive.

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Quite a spectacular collapse. I had never even noticed this entity before yesterday. I’m a top 40 kind of guy, small caps scare me and yesterday reminded me why.

The older you get the safer you need to be so I am also a top 40 and a follow the jockey kind of guy.

Conco did the electrical connections (cabling etc) on a windfarm built on my farm. I was very impressed with the way they worked, looked like minimal wastage and very efficient but Conco was just one part of it. The perfect storm as on paper it looked rather good.

Then too the Eskom/ANC/Zuma delays with the whole renewable energy program hurt not only them but all involved in the IPP program to the extent that I am sure some of the bigger windfarms and other projects will never be built. The project on my property was going to have 240 wind turbines, but now only has 40. The plan was to carry on building for a few years, people moved in here, kids at school etc but now all gone. The finance arranged in anticipation of the rest of the project cancelled or used elsewhere. Thanks Zuptas.

These ANC criminals are stealing from the poor. They are enriching themselves to the detriment of children and the most needy part of society. By delaying the green energy projects the Zuma faction prevents the social beneficiation schemes that are part of green projects from providing financial aid to rural communities.

When the livestock on Thandi Modise’s farm died due to neglect, it should have been clear to us that if they can do this to animals, they will do it to people. The Life Isidimeni disaster is proof of the damage this negligent and criminal government continually does to society. Like one of the witnesses at the hearing put it, “The government tortured 143 people to death”.

That might be the of Top 10 holdings in CIL, but it should read top 10 companies that cant read a Balance Sheet or Cash Flow Statement. Thanks, now I’d never think of investing my money with them…

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