CIL: H1:17 Earnings Miss, Share Price Misses More

I have written about Consolidated Infrastructure Group (CIL) a number of times (see this), but after the stock’s earnings miss yesterday I think I should update that view.

I cannot speak for the market, but I was expecting HEPS of +5% for FY 17E. CIL reported HEPS of -18% for H1:17A (read here for some more details). Yes, there is still six more months to perhaps hit my original target, but that is unlikely. This is an earnings miss, and that is an unfortunate fact.

What happened?

Quite simply the following three things negatively impacted CIL’s H1:17 HEPS:

  1. Strong ZAR: CIL earns a large chunk of its revenues in USD across the continent. A strengthening/strong ZAR means that these USD-revenues consolidate for less ZAR in CIL’s financials. Management estimate that this cost them around 10% to revenues and bottom-line during the period. The ZAR won’t be strong against the USD forever (or even for most of the time).
  2. Dilution from rights issue: CIL recently bought Conlog (see here, it is a great business). It funded most of the transaction from a rights issue, which created c.20% dilution of the Group’s HEPS number with more shares in issue during the period. Post-FY 18, dilution from this rights issue will be completely out of CIL’s system.
  3. Collapse in Angolan Profits: CIL’s AES associate in Angola saw its profit fall 47% p/p in H1:17. This is unfortunate, but its business is still profitable, cash generative and–contrary to popular belief–CIL is expatriating plenty of cash out of it back to South Africa. While AES is still in CIL’s Group-wide numbers, a drop in profits that large still had a -14% impact on Group profits. Commodity prices go up and down. This one is random, but I give it very little value in my sum-of-the-parts (SOTP), so I tend to ignore its earnings volatility.

Here is an interesting graph that I have built normalising CIL’s EBITDA for these three once-off impacts:

Bear in mind, these are my matchbox calculations, but EBITDA growth of c.41% p/p is still impressive. Taking dilution back into account, HEPS still would’ve grown by c.+22% p/p without these other two negatives dragging on it.

The Group’s quiet growth in perhaps best represented by its Order Book in the Power segment (this segment is still predominantly made up of Conco orders, but Conlog is also now a large part of it):

 

Not just has CIL’s Power Segment’s Order Book grown steadily at c.20% y/y (H1:17 growth was actually +25% y/y!), but the Group’s entire market cap as a percentage of size has been steadily falling over the last couple of years (even including the rights issue).

Something that is also worth remembering is that CIL’s is more than just its Power segment. While Power is its largest segment, the Group still has railways, building materials and O&G in Angola while the Group management is strong on capital allocation and continue looking for future acquisitions. Interestingly, the Group’s Corporate centre (much like PSG) is actually profitable…

Anyway, what is CIL worth?

Well, my fair value for CIL sounds crazy, even though I see full-year FY 17E HEPS -7% y/y (assuming a steady USD/ZAR). One or two earnings misses do not make a business a bad business. The key operational metrics in CIL’s group are actually flying, its businesses are generating better-than-before cash and its balance sheet is looking robust.

The question is: how much are you willing to pay for the Group’s earnings? At a 7.1x Price Earnings (PE), CIL shares are not exactly expensive and you are paying very little for future growth. So, I am not even sure that this argument is around CIL’s future growth. At these prices, I think the argument the market is making is that it is questioning how sustainable CIL’s entire business is…

That kind of makes CIL a binary bet: If you believe that CIL is sustainable, it is cheap. If you believe it is not sustainable, it is probably still expensive as its share price is still not zero. But, if CIL is sustainable, then you are pretty much getting its future growth for free here.

In conclusion, I see CIL’s Power segment alone as worth more 2200c per CIL share. If you can see beyond the short-term HEPS number, CIL’s group is doing well and will likely continue to do well. Thus, with CIL’s share price languishing in the mid-1700cps, I remain firmly bias on this investment and disagree with the way the market is pricing it.

I may be mad, but I still see CIL as the magical combination of a high-quality Group that is growing at a very fast growth rate and, yet, you are paying very little for its shares (single digit PE).

Time will tell if I am crazy.

Post Note: CIL versus International Peers / Comparatives

CIL has equivalent-to-better returns than its peers

CIL is relatively cheaper on EV and PE bases 

 

Probably the most revealing ratios above are the following:

  • (1) CIL has a ROIC (based on pre-tax operating profits, as these comparatives are from all over the world) that is almost 50% > than the peer average, and yet

(2) CIL has a PE ratio that right at the bottom of the peer group.

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