An update on Conduril

I bought my first shares in Conduril in 2012 for €22/share, and now, almost 7 years later we are roughly back to where I started with shares trading at €25. It hasn’t been a total dud though, because in that period the company did payout a total of €9.50/share in dividends. I was also lucky enough to sell a large part of my position in 2014 and 2015 between €65 and €80/share when I saw deteriorating results appearing on the horizon. It has been a while since I wrote about Conduril, and with the publication of the 2019 interim results I thought it was a good idea to publish a quick update, starting with an updated overview of the historical financials below:

Historical income statements Conduril

When I bought my first shares on Conduril the company was doing pretty well, earning in some years more than €20/share, but the past years the results have been more modest. Last year the company reported €1.69/share in earnings which was actually a small miracle considering that they lost €9.15/share in the first half of the year. The first half of 2019 was also pretty bad with a loss of €4.52/share, but based on the language in the interim report the company is confident that this year will be better than last year. Given that the backlog has increased from €300 million at the end of the year to €600 million now, that might be a fair assumption. In the period between 2009 and 2014 Conduril was on average earning €16.70/share per year while the average backlog was €618 million. So it could be on the edge of turning things around.

While things seem to be turning around for the construction business itself, there is also a balance sheet aspect to the story. Conduril is at the moment a classic net-net with NCAV/share of €28.70 versus the current €25.00 share price. This number is excluding €89.8 million in “other financial assets” that are recorded as non-current assets on the balance sheet. Adding this to the NCAV would result in a value of €78.58/share. So besides the stock currently trading at a 4x P/E-ratio there is also a good amount of asset backing.

Unfortunately, there are some potentially losses hiding in the “other financial assets” that erode to some extent the asset backing that this stock has. Conduril has made a €13.2 million investment in the “Rotas do Algarve Litoral, S.A.” and a €20.3 million investment in “SPER, S.A.”, two toll roads in Portugal. The “Rotas do Algarve Litoral, S.A.” is facing legal troubles because the “Tribunal da Contas” declared the original contract invalid, and “SPER, S.A.” is possible facing the same. “Rotas do Algarve Litoral, S.A.” is seeking the recover the full amount of the investments from “Infrarastruras de Portugal”, the party that seems to responsible for this mess, but of course, what the outcome will be is highly uncertain and could take a long time. Writing down both Conduril’s investments to zero would leave us with an adjusted NCAV of €59.80/share.

Conduril has one of the rare companies where I have always been enthusiastic about its valuation. Sure, things haven’t gone great the past few years, but at the current price it is just really cheap. Even without factoring in that things look to be turning around it is trading at a 4x P/E-ratio, 0.22x book and a sizable discount to (adjusted) NCAV. But who knows, after seven years I could also just be wrong about this…

Disclosure

Author is long Conduril

20 thoughts on “An update on Conduril

  1. Chris

    Great post, thanks for the update. Would you be able to provide a link to the 2019 interim results as I can’t seem to find them anywhere?

    Reply
  2. GNP-GlobalNosePicking

    Isn’t Conduril heavily dependent on public investment? I.e. if Portugal budget is tight, perspectives are meager? In the case of some competitors of Conduril: they had operations in some african countries (normally at big margins because of corruption, sorry to speak the crude truth),… and now some chinese players entered the game. How does it look for Conduril in that front?

    Reply
    1. Alpha Vulture Post author

      Conduril is like the other Portuguese construction companies you are familiar with. They also have a lot of operations in Africa (mostly Angola) and especially the last few years almost their whole backlog consisted of projects in Africa. Now 30% of their back log is in Portugal, so actually things are turning around a little bit there for them (has been as low as 7% if I remember correctly).

      How competition from China is impacting them is not something I know, but yeah, the Chinese are very busy everywhere in Africa, and for them it’s easier to navigate a business environment where bribes and corruption is more common (to say it nicely…).

      Reply
  3. Tom B

    Be careful with the “Outros créditos a receber” line in the balance sheet. It is growing in recent years and seems to include “under billings” often used by construction companies to inflate earnings (thanks to ridiculous percentage-of-completion accounting rules). These are management-designated receivables (not anything the client has agreed to actually pay yet) and shouldn’t be on the balance sheet IMO. Companies get away increasing this balance as long as backlog growth doesn’t turn negative, but when it inevitably does, we get to find out who was swimming naked.

    I’d focus on the balance sheet and cash flow on this one much more than the income statement. Construction companies are not good businesses IMO usually, and percentage-completion accounting makes the income statements useless.

    Reply
    1. Alpha Vulture Post author

      Good point. Historically they have managed to turn earnings into cash, but certainly not fast and not always without issues (they now still have a bunch of Angolan government bonds for example).

      Reply
  4. GNP-GlobalNosePicking

    It comes to mind the two old big cement players. In the good old times, they managed to portray nice profit margins thanks to opeeate in cartels. Big Crisis came (driven by real estate, and sub-prime lending) and from day to night governments no longer tolerated cartels. The 2 big cement players had to merge as there was not market for both.
    Bottomline: I would not invest in cement companies as long-term they have little chance to create value. Don’t see them as high quality companies with healthy margins, either.
    Conduril, does neither seem (to me) a great busines model / company … For me they are in the same basket as big “cementiers” (LH)… So won’t touch them.

    Reply
    1. Alpha Vulture Post author

      But you don’t need Conduril to be a great business at this price. You don’t even need it to be average (which it might be). It only shouldn’t be truly bad and terrible. Your buying it at 0.2x book value right now.

      Reply
      1. GNP-GlobalNosePicking

        As per WSJ, right now, PB ratio ~ 0.35… And who knows how manipulated the Book Value has been. Additionally, I would not trust those who foster corruption for own benefit. Then they can do anything for own benefit…

        Reply
        1. Foster

          So what you’re saying is: this is not a great business, so I wouldn’t own it at any price?

          I think you’re not reading the right blog then 😉

          Reply
  5. GNP-GlobalNosePicking

    Btw, anyone can check in the last years the cost of capital of LH was above RoI, clear example of value destruction…

    Reply
  6. michael

    Did you ever consider to buy Russian stocks? The reason I’m asking is that these stocks are very cheap with p/e’s around 5 and price to book < 1. Further, the Ruble seems to be undervalued too. The problem, however, is that many of the companies are controlled by the Russian state, which has its own agenda. The dividends are high at 7% +

    Reply

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