Electrification in Africa is a huge theme. The bulk of households in sub-Sahara Africa do not have access to electricity and, where it is available, it is poorly distributed and maintained or fluctuates wildly. More and more, these people will demand access to electricity, as the ubiquitous availability of cellular phones has made them increasingly aware of the quality of living improvements that it can offer. At the same time, access will become more viable through the increasing development of Africa, the consumers’ rising purchasing power and the continuing decrease in the cost of renewable energy providing a viable alternative to more standard large scale technologies.
All of these trends play into the hands of the companies, who build and maintain the infrastructure that is required to distribute this electricity. Consolidated Infrastructure Group (CIL) has grown phenomenally over the last few years, as they have complimented their position as a market leader in South Africa with a large and growing business in a plethora of African countries. They are positioned for the growth that is certain to come in Africa and have increased their cash flow from operations at home by diversifying into the smart metering market through the acquisition of Conlog.
The company has strongly growing revenue, and EBITDA and a ballooning order book. With their latest earnings, CIL is trading on an approximate PE of 9. Furthermore, directors and associates hold 9% of the company, showing a vested interest from management in the long term performance of the business.
It may sound petty, but it always raises an internal warning signal, when a company does not make their financial results easily available. Rather than most other companies, CIL did not publish their results on SENS, rather they informed investors that they are available on the website. When attempting to find the results on the website, the link to the 2016 results pops out the 2015 result pdf file. Finally, after some search, I found the 2016 annual report.
Ohhh and also the company did not declare a dividend.
A look at the financial results shows a possible explanation why the financials are so difficult to find and also why the company does not pay a dividend.
In the last year “amounts due from contract customers” increased by R1bn to a total of R3.7bn. To put that into perspective, the increase in receivables is more than the entire gross profit of the company in the last year, putting a severe strain on cash flow. These appear to be owed by various sources and from various contracts. The company is trying to offset this by delaying their own ayables, but this will not be a sustainable solution.
R3.7bn is more than half the assets of the company. It is also more than the entire NAV of the company. R25/share in “amounts due from contract customers”, more than the current share price.
Of course, delayed contract payments of this nature and working capital management are part of operating in the construction industry, but increases of this size and exposure of this severity should warrant a few explanations from management. Unfortunately, none can be found in the annual report.
Due to this large exposure and increase in receivables, I am no longer comfortable being a shareholder in this business and have sold my shares. However, I remain very optimistic about the long term future of the electricity sector in Africa and am using ARB Holdings as my exposure into this theme.