Consolidated Infrastructure Group Ltd (CIL) has been an interesting small-cap growth share, having moved from under 500c to over 3300c over the past five years. I can certainly understand why the market has loved the company. This growth in the share price has largely been driven by growth in revenue and earnings as well as a rerating as the PE ratio has moved higher. So while the company was trading on a price:earnings (PE) ratio of under 7 five years ago, today it trades on a PE of over 18.
This growth is share price could be considered justifiable considering that the company has seen a steady growth in HEPS to the extent that the latest trading update guides growth of between 30-35%, which translates into a range of between 179,2cps and 186,1cps.
The backdrop to CIL’s success has been electrification on the African continent, particularly Angola. The company is an installer of high-voltage electrical substations and overhead cables across the African continent. The company grew out of AltX listed company called Buildmax that produced and supplied a range of construction materials, including aggregates and a wide range of brick and roof tiles. This is still part of the group, but currently only contributes around 13% to revenue and around 17% to earnings.
The majority of CIL’s earnings come from its Power division, Conco, which claims to have an order book of around R2,85bn. One of the challenges that the company has is the necessary skilled labour and resources to deliver on these orders, but a few months ago it raised R324 million though the issue of shares and part of those proceeds were earmarked for an acquisition and the balance will be used to fund these projects.
Very often, when a company grows so rapidly, one of the biggest challenges is controlling its cash-flow. The amount due from contract customers increased significantly more than the increase in revenue, which could be interpreted that the company is struggling to collect on its sales. Also over the last two reporting periods  the company’s current and non-current liabilities increased and over the last reported six months there was a cash decrease of R103m. Having said that, I am not concerned about working capital requirements at this stage, but it is something that needs to be looked at before deciding to invest.
The company also has very ambitious plans with regard to its investment in Angola Environmental Servicos Limitada (AES) which is a service provider to oil and gas rigs. The AES business is expected to continue its organic growth due to the increased oil drilling in Angola and legislated environmental requirements in the drill cutting law. In my view the AES operation is going to be a strain on cash and could well result in the company needing to raise further capital, perhaps resulting in futher share dilution.
I am of the view (and I could be very wrong) that management have been chasing revenue and have been fortunate to also achieve profit in the process. However, this has been at the sacrifice of return on equity and cash-flow. There is a saying that revenue is vanity, profit is sanity, but cash-flow is reality.
In the short-term growth of 30% or higher may be sustainable, but I think that this growth will come at the cost of cash-flow. The company is trading at approximately 2.6x its net asset value, notwithstanding its order book, it delivers revenue of just north of R2,2bn per annum, but trades on a market-cap of R4,85bn.
Although this has been a growth story, ROE has been under 14% and I anticipate that it will drop further due to the need for additional capital. There are still some inherit risks as the company explores AES, absorbs recent acquisitions and attempts to collect on its debtors book. In my view it was a great investment, but is now perhaps looking a bit expensive and I would not be buying.
