Conduril reported interim results for the first half of 2014 at the end of September. The business performed well. Revenue increased with 9.7% compared to the same period previous year while earnings increased with 6.6%. It’s a bit questionable if the company will be able to continue to grow revenues in the near future since the backlog decreased from €750 million at the end of the year to €600 million now. An overview of Conduril’s historical earnings:
What we see is that EBITDA decreased despite the growth in revenues, but earnings went up anyway thanks to a lower tax rate. Conduril has been paying lower taxes since the second half of 2013 because it is no longer double taxed on earnings from Angola: lowering the effective tax rate from more than 50% to a more normal ~30% rate. The fact that the nominal tax rate in Portugal was lowered from 25% to 23% also didn’t hurt.
The most significant development is however not found on the earnings statement, but on the balance sheet. A new entry is a €74 million asset classified as held for trading while outstanding debt increased with an almost equal amount (€67 million). These assets are certificates of public debt that Conduril received from the Angola government for past due receivables. Since Conduril has a large amount of receivables on its balance sheet this is both good and bad news. It shows that Conduril isn’t always paid on time for the public works they construct in Africa. But it also shows that the receivables are backed by the state so that the credit risk remains acceptable. Moody’s recently upgraded Angola’s credit rating from Ba3 to Ba2 with a positive outlook. Not the most solid rating, but not bad either. So don’t think it’s a big deal that it will take a bit more time to convert some of the receivables into cold hard cash.
Disclosure
Author is long Conduril
Hi – May I ask how were you able to discover that the €74m of AFS are Angolan gov’t certificates?
Thank you.
See note 18.3 in the interim report
They look excellent value,but seem to be very thinly traded.Sad that the two things often go together.Spread about 10% wide.
It’s certainly not the most liquid stock, but it’s not that hard to build (or sell) a sizable position with a bit of patience.
I don’t understand why the increase in debt would be related to them receiving certificates of public debt from the Angolan government? Correct me if I wrong, but I understand the entry here should simply be a reduction of A/R and increase in assets held for sale. This isn’t debt Conduril owes to a third party; this is effectively bonds they have been given and will be receiving interest and ultimately the principal repayment unless they sell them in the market, no?
Are you implying the debt increase is driven by conversion of A/R to assets held for sale?
I don’t follow this logic, as I understand it, these securities are bonds payable to CDU not by CDU.
The debt increase is not directly caused by them receiving certificates of public debt, but it is related: they did not receive cash from their receivables so they have borrowed to generate liquidity.
I have taken a look at the receivable growth since 2009 and it appears that Conduril is performing services receiving receivables in return part of which are converted to Angola certificates of public debt when the receivable becomes too past due. It also appears that they have invested about Euro145 million in receivable since 2009 (when receivable levels increased substantially), calculated as the cumulative difference between NI (Euro 150m) and CFO (Euro 5m) per Bloomberg. Now half of the investment is past-due is being converted into Angolan paper. Do you know the terms of the paper and whether it can be converted to cash and how much does Conduril reserve for the receivable? Thanks.
Packer
Don’t think the Bloomberg numbers are correct. Excluding the results from the interim report: total earnings since 2009 has been E151 million while cumulative CFO has been E31 million (it looks a lot better if you start at 2008 or 2010 since CFO was +94M in 2008 but -18M in 2009).
Don’t know the exact terms of the paper. I do know that it is denominated in USD (so no currency risk), but don’t think it is easily converted to cash. They intent to hold it until maturity.
Do you know the maturity of the Angola paper?
Interest rate?
Don’t know
The balance sheet of December 31, 2017 mentions that “other finanical investments” have increase to 85 million EUR. According to item 18 some of the finanical assets held for trading were converted to this non-current asset.
Do you think, this item is something to worry about? How secure are these public dept securities of 55 Million Euro?
In the latest interim report almost all the “other financial assets” have been converted to cash, as was announced in the 2017 annual report so that part of the balance sheet is no longer risky. Of course, Conduril continues to have a significant credit exposure to Angola.
Hi AV, where did you get the latest interim report from? The latest document I can see in their website is for the 2017 accounts.
Thanks!
Thank you very much for this useful information. Cash is definitely better that the “other financial assets” which was part of the long term assets of the balance sheet. If there are 55 Million Euro more of current assets and at a share price of 40 EUR, Conduril should be a Graham net net investment again.