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:

I’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:

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

Disclosure

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

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:

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:

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?

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.

Disclosure

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