Conduril reports results for 2017

Last week Conduril released their annual report for 2017 (Portuguese version only, the English translation follows later). The company is still struggling a bit, but I think there are good reasons to be optimistic. Compared to 2016 revenue was basically unchanged, while EBITDA increased from €29.1 million to €34.5 million and net income increased with 65% from €4.2 million to €7.0 million. Thanks to the higher profitability Conduril has announced to increase its dividend from €0.50/share to €1.50/share, a payout ratio of 39%.

This is of course all pretty decent, but I think the most important announcement in the annual report is that the Angolan bonds, worth €83 million, will finally be turned into cash. Last year I was already waiting for that, and it’s not yet reflected in the financials, but supposedly they were settled on March 21, 2018. Given that the company has currently a market cap of €77.4 million that’s a pretty big event. That means that they can repay the fast majority of their outstanding debt (€116.7 million in total) and the reduced interest expense should have a meaningful impact on their profitability going forward. Even after the settlement of the €83 million in bonds Conduril will continue to have a large exposure to Angola. The non-current “other financial assets” line item hides €55.5 million in debt securities that were previously classified as “assets held for trading”.

Given that the removal of Conduril’s debt could almost double its profitability I think the stock remains extraordinarily cheap. Right now it’s trading at just a 11x P/E ratio, and if we include the “other financial assets” in the NCAV figure it’s trading at a 50% discount to that number as well.


Long Conduril

18 thoughts on “Conduril reports results for 2017

  1. JG

    Not so sure profit will double on debt reduction alone next year.

    I usually try to adjust their earnings for some of their ‘other income/other expense’ line items that are not per se recurring in nature (most notably the FX effects, dividends, and interest based on their holdings in Angolan debt securities).

    For 2017, the 4M dividend in other income stands out, its to be seen if this will be repeated in 2018, as basically no dividend have been received in the 5 years before 2017 (i will try to ask the company…). I would also expect further lowering of interest income as it seems they continued to sell down their Angolan debt securities in 2017.

    They seem to pay around 9.1% for their debt in 2017, and given their average tax rate over last 9 years of 41.5% (quite some inefficiencies that increase their base rate it seems…) an 83M reduction would lead to +4.4M in after tax profits. Given that the debt was still on the balance sheet in Q1 2018, we should deduct at least 25% of that for 2018. If that 4M dividend is not recurring, and interest income will go down, it won’t even be enough to offset that….

    Some other Comments/Questions:
    @ FX Effects: Does anybody has any real clue how this influences their core profitability? History does not present a clear picture as they have positive net FX effects both in years the currency went up as down, and widely varying in magnitude. I have always assumed its positive for their core business if local currency weaken, and USD strenghtens vs the Euro, as their contract are usually in USD/EUR while costs are in local currency and presumably are paid only after some time. I do think some Balance sheet item translation FX effects are also in this other income/expense line, otherwise I really can’t grasp the magnitude of their FX effects lines.

    @Backlog – Did you notice that they reported 300M in backlog vs 400M in H1, while they did 75M in revenue? Sounds like a significant project cancelation?

    @Angola – They are talking about restructuring their debt. Continued longer term exposure to those debts should be haircutted I think by a certain percentage.

    1. JG

      Perhaps I sounded a bit negative, so want to point out that H2 2017 showed a very strong core business performance. Adjusting the numbers, 2016 showed a net loss, and adjusting for dividends and the like, H1 2017 also showed a loss. However, in H2, the underlying business became profitable again, while still burdened by high interest costs. If they can continue this and get some positive effects from the ‘other income/expense line’ doubling of profits can certainly be achieved.

    2. Alpha Vulture Post author

      About the 4M in dividend income; no idea if that’s recurring, but it could be. They made like 30 million of investments last year (part of the non-current financial asserts) so that could be the source of the 4 million dividend. But some clarification from the company would be welcome.

      @FX effects: yeah, there is a lot going on there. I will not pretend that I understand it really, but my assumption was/is the same as yours. I will have to take a closer look at the accounting to see if there are balance sheet items that flow trough there, but too be honest; I wouldn’t expect that those numbers can be very big. Because that would imply that there should also be a big variance of the value of balance sheet line items such as PP&E, and don’t really see that. But will need to read the footnotes to be sure.

      @backlog; yes, I noticed that it is down. Also think they changed their wording a bit this year. Now they talk about a high-quality back log, and think last year their description was more neutral (but I might be mistaken about that).

  2. pietje

    I think they had both a receivable guaranteed by COSEC and a position in Angolese bonds. The way I read the annual report the COSEC receivable is coming in (which is the 83m) but 55m of the Angolese bonds were transferred to (non-current) ‘other financial investments’.

  3. Dave

    Why were the Angolian bonds be transferred from current to non-current assets if they are going to be turned into cash soon?

    1. Alpha Vulture Post author

      Those bonds will not be turned into cash soon. The receivables that will be turned into cash / have already been turned into cash are a different line item (and classified as current).

  4. EON

    This stock trades like 30 shares per day. How could you even get $100k into it? Am I missing something – is there another exchange it trades on?

    1. Alpha Vulture Post author

      If you have a bit of patience I think it’s not that hard to acquire a nice position (as long as you don’t need to invest millions). With some regularity there are blocks of a couple of thousand shares available for sale.

  5. MR

    Hi there,

    First time writer on your blog, as you really have picked my attention on Conduril. Have been following you ever since you wrote about Italian Reits, in which I am invested (happy to discuss these another time if you’d like).

    Most likely due to my lack of due diligence, I have a few questions regarding Conduril. Would be royal if you took some time to respond.

    1 ) I can’t seem to find any information on the remaining ca. 55m Angolan bonds. Would you know when these mature, how much interest is being paid and why they were sold / given / issued to Conduril? Could you point me towards any company report on this?

    2) Do you know how much is currently being owned by majority shareholders? How likely do you think this stock to be a value trap?


    1. Alpha Vulture Post author

      1) If I remember correctly the remaining bonds have a maturity in 2022/2023. Not sure if it’s disclosed somewhere in an annual report, of if it’s directly from the company.

      2) That’s disclosed on one of the older annual reports. Past few years they have only reported the mutations in the holdings of the insiders. But they own a bit more than 50% I think. Pretty sure it’s in one of my blog posts 🙂 And whether or not it’s a value trap… I don’t think so, but patience is probably required.

  6. Patently Absurd

    Will there be an article on the Condurial annual report 2018? The report has been published recently. EPS is low but management is reporting on improvements in the order book. I was surprized to read that the management compensation has doubled to almost 2 Million Euro, which is significantly more than the dividends paid out to shareholders.

    1. Alpha Vulture Post author

      Hi P.A.,

      Wasn’t planning to write a post about it, but I’d say the results were okay and the outlook is somewhat positive while the price is still cheap (or again cheap, depending on your perspective)…

  7. Patently Absurd

    Thank you. I agree, the results are OK taking into account the overall economic situation in Africa. What I am concerned about is the management compensation which increased while at the same time, the dividend was significantly reduced. Also management is not particularly communicative.

    I do not have much experience with this kind of situation, i.e. small company being managed by a family member of the major shareholders. I believe that management compensation vs. payout to shareholders is a factor that seems to be considered.

    1. Alpha Vulture Post author

      Yeah, that was an item that stood out a bit in a negative way. But given that management compensation has been flat for the previous 7 years or so and that they have a solid history of paying dividends I’m not overly concerned at the moment. But it’s certainly something to keep an eye on.


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