JSE-listed Consolidated Infrastructure Group (CIG) on Tuesday reported a 26% year-on-year increase in revenue to R1.7-billion for the six months ended February 28, while its aftertax profit grew by 36% year-on-year to R164-million.

The higher profit was driven largely by a 90% increase in profit contribution from CIG’s Angola-based AES oil and gas services operation, as well as continued growth and order book improvement within its power and electricity division Conco.

Further, along with headline earnings a share rising 24% to 110c a share, up from 88.5c in the previous period, the infrastructure-focused company reported a cash balance of R460-million, of which R99-million had been collateralised to settle an Angolan obligation.

The group experienced high growth across its major sectors, with efforts to mitigate associated risks through conservative procurement practices and policies and ensure sufficient capital for expansion.

To assist with the longer-term funding requirements of a growing order book, CIG also implemented a R1-billion medium-term note programme, under which it had, to date, issued R530-million.

An ongoing diversification strategy across a wider geographic footprint was also pursued and, as a consequence, 50% of aftertax profits were derived from outside South Africa.

Management’s initiatives to diversify the group’s operational portfolio across a wider range of business sectors also gained momentum and the contribution to group results from the power sector reduced over the last two years, from 80% to 53%.

CIG subsidiary Conco, which contributed R1.4-billion to the group’s revenue, continued to gain traction and successfully delivered high-voltage electrical infrastructure across all of its African sectors, as well as into Saudi Arabia.

The subsidiary benefited from equal demand from African utilities, the larger South African municipalities and South African and international independent power producers, resulting in its order book increasing 30% year-on-year to R3.7-billion.

In the renewable-energy arena, Conco demonstrated its capability as a preferred supplier, securing tenders from 70% of the successful Renewable Energy Independent Power Producer Procurement Programme round three bidders and is still negotiating on the remaining contracts.

Conco Power Maintenance delivered a maiden profit to the group and increased the number of contracts under management by 33%, the vast majority of which stemmed from the solar photovoltaic market.

The energy solutions division entered the low-voltage market sector to supply motor control centres and distribution boards and performed in line with expectations, while the building materials division enjoyed higher demand from the residential building sector and inroads into the turnaround of the Laezonia operation contributed significantly to its overall growth. The division successfully grew market share, albeit with some margin sacrifice.

The group's oil and gas waste disposal provider AES reported a 66% boost in attributable earnings as a result of increased rentals and waste volumes processed in the period.

CIG’s acquisition of AES became effective on October 1, 2013, with five months of attributable results included in the prior interim period. The inclusion of an additional month’s profit and the depreciation of the rand-dollar exchange rate during the six months, boosted profit for the period by 24%.

Tractionel, the group's rail business, which it acquired during the six-month period, produced lower-than-expected revenue and order acquisitions, but it was awaiting adjudication on R1-billion of tenders.

CIG noted that this provided “enormous short- and medium-term potential”, as South Africa was upgrading its rail infrastructure to manage the roll-out of its new locomotive programme.

OUTLOOK
Commenting on the prospects of the group, CEO Raoul Gamsu noted that CIG was proud of Conco’s reputation for providing innovative technical solutions on time and within clients’ budgets, which was demonstrated in the growth in the order book, both in absolute terms and in average project size.

“The prospects of the division are robust, with an expanded execution horizon and diversified geographic base. Business development initiatives among the geographies should lead to positive outcomes in the next 12 months,” he noted.

Conco's prospects in South Africa within the larger municipalities and government’s renewable-energy feed-in tariff programme were expected to yield above-average growth.

Despite an economy constrained by power shortages and slow growth, it was expected that the building materials division could sustain its current growth trajectory.

The AES business was set to grow organically, owing to the legislated environmental requirements of Angola’s zero-waste drill cutting law. Increased production from the oil majors was assisting the business and management was unaware of any significant curtailment in oilfield development or exploration in Angola.

CHALLENGES
Meanwhile, Ramsu noted that the change in the broad-based black economic-empowerment (BBEEE) legislation and the weakness in local manufacturing posed a new short-term challenge to Conco’s traction in South Africa.

He added that management was following the required actions to ensure that the Conco South African business maintains its required black economic-empowerment rating to maintain its ability to transact within South Africa. “Initiatives have been implemented by Conco management to assist the local manufacturers with orders for additional volumes and contracts,” he noted.

It was expected that over the medium to longer term, the biggest constraint to growth would remain the availability of suitably qualified engineers to execute on the expected increase in technically complex work.

Owing to the noted undersupply and underservice of the African continent with power and electricity, CIG established CIGenCo, which would identify niche power generation opportunities. CIG had appointed a CEO with an “outstanding record” in developing these opportunities in emerging markets.

It was anticipated that there would be a minor contraction in margins, as international oil companies strive to save costs across their supply chains. The impact of this margin contraction could be mitigated from three areas.

“Firstly, volumes should expand to comply with the legislated requirements. Secondly, AES derives 50% of all revenues from long-term rentals, which assists in providing a steady annuity stream of income.

“Thirdly, the relocation of waste processing from rigs located in the north of Angola to the new facility in Soyo enables the international oil companies to materially save on their logistical costs,” Gamu noted.