Tag Archives: CDU.LS

Reduced my position in Conduril

I have been reducing my position in Conduril this month because I think the risk/reward is at the moment not as attractive as it was earlier this year. This despite the fact that the share price declined with more than 25% from a high of €88/share to the current €65/share. The main reason is the sharply declining oil price, and the possible effect that it will have on Angola. Conduril is generating roughly 50% of its revenues from Angola while the country relies on oil for approximately 80% of its tax revenues. With oil below $60/barrel they have a problem:

fitch-report-on-oil-vulnerabilitiesI’m not someone who focuses on macro factors with my investments, but there is a difference between making predictions and recognizing reality as it is. And when a lot of future tax revenue is gone it isn’t exactly a stretch to assume that there will be a lot less money available in the coming years for stuff like public infrastructure: the kind of work Conduril does. It also increases Conduril’s credit risk on its outstanding receivables.

I don’t know if this realization is driving the decline behind Mota-Engil Africa’s share price. I called this company a good comparable to Conduril just two weeks ago because it’s active in the same sector and it is also getting roughly 50% of its revenues from Angola (it does however have a more leveraged balance sheet). When you see that Mota-Engil Africa is down more than 50% since its listing in Amsterdam three weeks ago the recent decline in Conduril’s share price suddenly doesn’t look that bad:

CDU vs MEAFR share price

Despite the sales Conduril is still my biggest position, just not as big as earlier this year.


Author is long Conduril, no position in Mota-Engil Africa


Mota-Engil Africa debuts on Dutch stock exchange

Last week Mota-Engil listed the shares of its African subsidiary on the Euronext stock exchange in Amsterdam. The company cancelled an IPO in London earlier this year and has now spun off 20% of the African subsidiary to shareholders. Mota-Engil wanted to IPO a part of the subsidiary at a price between €11.50 and €14.50. After opening at ~€11.50 last week the stock is now trading a bit below this range at €10.50 giving it a €1 billion market capitalization.

The valuation of Mota-Engil Africa is very interesting because I think it’s a very good comparable to Conduril. Conduril generated 93% of its revenue in Africa the past year, and they are for a large part active in the same countries. Mota-Engil Africa is active in the following countries:

Mota-Engil Africa activities

Both companies are big in Angola. Angola accounted for more than 50% of Mota-Engil Africa’s revenue in 2013 and Conduril is getting a similar percentage of its revenue from Angola. Conduril is also active in Zambia, Malawi, Mozambique and Cape Verde. Mota-Engil Africa is a lot bigger than Conduril though. They don’t even mention the company as a competitor in the listing prospectus when discussing the competitive landscape in Angola:

The Angolan construction industry had 44 major international contractors in 2011, however the industry is dominated by companies from Portugal, Brazil and China. Portuguese and Brazilian companies (or companies with ties to Portugal and Brazil) have leveraged strong cultural ties to build an established presence in the country with the Group, Teixeira Duarte, Somague Engenharia and Soares de Costa from Portugal and Odebrecht and Camargo Correa from Brazil winning the majority of new projects up for tender. In respect of Chinese firms, the model is slightly different, where China has acquired Angolan resources in exchange for infrastructure investment. Furthermore, extensive credit lines have been extended to Angola, although these are specifically to fund projects built by Chinese companies. As of 2011, there were 22 Chinese construction companies present in Angola.

While I do think that Mota-Engil Africa is a good comparable to Conduril the two companies are certainly not identical. Mota-Engil Africa is not only a lot bigger, but has also shown faster growth in the recent years as illustrated in the table below:

Revenue growth: Conduril versus Mota-Engil Africa

It also looks like Mota-Engil Africa will be able to continue its fast growth in the near term since they have been awarded a project worth US$3.5 billion in Cameroon (conditional upon financing being secured). Their biggest contract is currently the almost completed Malawi Nacala Corridor Railway Corridor that is worth €691 million. Because of the growth difference Mota-Engil Africa should trade at a premium compared to Conduril. But this much?

Valuation metrics Mota-Engil Africa versus Conduril

I don’t think so. A big project is nice for Mota-Engil, but it’s probably not sustainable growth since it will probably be extremely difficult to replace their backlog once it’s completed. With a P/E-ratio of 10.84 the market is presumably also not expecting growth miracles from Mota-Engil Africa. So it should be a reasonable comparable, and possibly undervalued itself given where it is trading compared to the proposed IPO range and the relative low P/E-ratio given its growth.


Author is long Conduril, no position in Mota-Engil Africa

Conduril 2014 interim results

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:

Historical earnings Conduril (2014 interim report)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.

Historical Conduril balance sheet (2014 interim report)Disclosure

Author is long Conduril

Half-year portfolio review, 2014 edition

Since it’s the first of July it’s once again time to take a look at the performance of my portfolio. A double digit return in just a half year is a pretty solid result, but I have no illusions that this is sustainable. A bad year will be inevitable, and you have to remember that what matters is not a high arithmetic average return, but a high geometric average. You are not going to get a high growth rate if you also have large negative outliers in your returns. But obviously the results so far are encouraging, also compared to the benchmark:

Year Return* Benchmark** Difference
2012 18.53% 14.34% 4.19%
2013 53.04% 17.49% 35.55%
2014-H1 23.08% 6.86% 16.22%
Cumulative 123.27% 43.55% 64.14%

* Return in euro’s after transaction costs, dividend withholding taxes and other expenses
** Benchmark is the MSCI ACWI (All Country World Index) net total return index in euro’s

While I’m happy with the overall performance of my portfolio I’m less pleased with how this result was achieved because things would have looked significantly different without my position in Conduril, and I think I made a couple of mistakes that I shouldn’t have. The graph below shows how my various positions contributed to my year to date performance:

Performance attribution 2014 H1Conduril accounted for a whopping 66% of my profits the first half of 2014. If we would exclude the results of this position the gain of the portfolio would still have been a respectable 11.1%, but that’s a result that’s a lot closer to the benchmark. On one hand it’s good to see that what I perceive to be my best idea is also my best performing position, but on the other hand having a large number of positions/idea’s that appear to be slightly above average is not so great. But that’s probably the reality that I should expect. Great idea’s will be rare to find, and a portfolio that manages to outperform the market with a couple percentage points is nothing to sneeze at. My portfolio currently looks as follows:

Portfolio overview 2014 H1

The position that immediately catches the eye is of course Conduril that is almost crossing the 30% level. It was already a pretty big position at the start of the year with a 22% allocation and thanks to the gains in the first six months of 2014 it got only bigger. There has to be a point where I need to start selling simply to manage my risk, and unfortunately it can’t be too far away from the current size. I really hate the idea of selling my cheapest stock with the most potential for further appreciation, but it’s also important to recognize that there are always risks that you and/or the company cannot anticipate and control.

With regards to my mistakes – and I realize this is going to sound very results oriented – but I think my biggest losing positions weren’t that great. I don’t mind that I lost some money on WSP Holdings in the failed merger arbitrage, but there were a lot of opportunities for me to lose less. I could and should have entered in the beginning of the year at a lower price (or not at all), and I probably should have exited earlier as well. I did get the position sizing right though: it was small and as visible in the performance attribution graph the loss is very manageable. But that might also have been a factor in why I neglected the position a bit.

I sized my bet in Clear Leisure a bit bigger, but in this case I also recognized that it was a speculative and risky position. The stock simply might have been a bit too speculative anyway, and I also failed to properly consider how crappy trading and liquidity on the AIM market is. I should have set a higher hurdle to jump over for an idea where it’s hard/expensive to act when you change your mind.


Author is long almost every name in this post except for positions sold during the year