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Diversification delivers results for Calgro M3 as revenue shows growth

Johannesburg, 16 October 2017 – Listed property developer Calgro M3 Holdings Limited ("Calgro M3") today released its interim results for the six months ended 31 August 2017. The Group, which is focused on large-scale integrated developments, real estate investments (rental units) and the development and establishment of private memorial parks, reported a pleasing increase in revenue of 40.24% to R1.0 billion, up from R720 million in the previous period.

Wikus Lategan, CEO of Calgro M3 indicated that, "During the six months 7 473 houses were under construction and a further 1 057 (completed during the period) were handed over to our clients. There are approximately 8 000 additional serviced opportunities available for development across various projects." He went onto indicate that due to cash flow pressure, as well as to mitigate risk, infrastructure installation was limited.

During the period, the Integrated Residential Development business continued to focus on the private sector, but experienced difficult trading conditions. Lategan cited these as being delays in capital debt raising, which took longer to conclude than expected due to the challenging current economic environment. Social unrest, especially in Gauteng, impacted performance with delays in standing time and vandalism being experienced at almost all the Gauteng sites. The construction slowdown in the Western Cape due to the prevailing water shortage contributed to the difficulties experienced.

"We are fortunate to have 11 out of 13 projects contributing towards revenue and profits, which reduced the impact of delays. We are also investigating the possible sale or exit of non-core strategic land parcels and projects," said Lategan.

During the past six months, Lategan said that time had also been invested in identifying and securing new private sector focused projects.

Lategan added that the drive for increased annuity income formed part of the Group's strategy of adapting to a changing South African and global environment, but that the Group would remain focused on maintaining the underlying themes of property development that has become synonymous with Calgro M3.

"Additional investment in the Real Estate Investments and the Memorial Parks segments are well under way to support this growth. Given the political and economic landscape in South Africa, the short-term goal will be to build each of these businesses responsibly, while remaining watchful of potential pitfalls."

The Group indicated that it had secured its first international funding, a facility for €25 million on an unsecured basis for a period of six years, which will go a long way in underpinning the company's growth strategy.

Financial review
Increased operations on the construction of the units for AFHCO Calgro M3 Consortium (Pty) Ltd("REIT JV"), as well as construction of private sector units across projects, contributed to the growth in revenue and combined revenue. Combined revenue increased by 40.84% to R1.302 billion (2016:R925 million).

The Group's financial performance was, however, impacted by the development business' construction of these units for the REIT JV, in which Calgro M3 has a 49% shareholding. The shareholding resulted in 49% of the development profit being eliminated on consolidation as an unrealised profit, resulting in Earnings Per Share ("EPS") declining 26.72% to 47.71 cps (August 2016: 65.11 cps) and Headline Earnings Per Share ("HEPS") by 26.74% to 47.71 cps (August 2016: 65.13 cps).

"As the impact is material to our performance, new metrics have been introduced to measure operational performance between reporting periods, as well as to give stakeholders an indication of the Group's performance that is consistent between periods. As such, Core EPS and Core HEPS are now included in our reporting metrics," said Lategan

On this basis, Core EPS increased 18.42% to 77.10 cps from 65.11 cps in the comparable prior period, and Core HEPS was up 18.38% to 77.10 cps(August 2016: 65.13 cps). The net debt to equity ratio increased over the period to 0.62 (February 2017: 0.42) as a result of cash on hand invested in development of projects.

Cash flow from operations came under pressure during the period due to the increased construction   for the REIT JV and private sector units. Positive cash flows are expected once the units are completed and handed over.

Integrated Residential Developments
"The business realised an increase of 42.5% in secured private sector sales, but in real terms the increase was substantially more. However, the tightening of credit criteria by banks and negative consumer sentiment resulted in some sales failing to materialise. Given market contraction by roughly 11%, we are pleased with its market share increase," Lategan explains. The larger construction volumes will enable Calgro M3 to further benefit from improved sales efficiencies.

Although construction activities in Cape Town were slowed down due to the continuing water shortages, construction continued with a focus on dry works rather than wet works. The water shortages are monitored closely. The Group's water-saving initiatives will allow both forms of wet and dry construction to resume to previous levels as soon as November 2017.

"We have taken account of the water shortages, and because we are driven by sustainability and responsibility, protecting our environment is of tantamount importance. I am proud to say our sustainable solutions and ongoing investigation into driving efficiencies has paid off."

"The Group's water saving initiatives undertaken in the past six months (country wide) to recoup the approximately 8 500 litres of water per unit used through the construction phase, both on and off-site, within three months after completion is a feather in our cap", Lategan went on to say.

Lategan said that the development business has created critical scale in the construction of units to the private sector through the development of the first phase rental units for the REIT JV, as well as increased private sector sales.

All town planning approvals have been received on Vista Park (Bloemfontein), Kwa Nobuhle (Port Elizabeth)and Bridge City (KwaZulu-Natal), with Bridge City being the first of the three new projects to go to ground in the next six months.

Government remains committed to the roll-out of housing projects, with Calgro M3 well positioned to benefit. The development business is in constant consultation with Government on various future
strategies, in an endeavour to assist with the housing delivery shortfall.

Real Estate Investments (rental units)
The Real Estate Investments business presents new opportunities in an environment where housing is a necessity, but affordability remains a challenge.

The first 1 372 units of the Phase 1 project in partnership with SA Corporate and AFHCO, consisting of3 852 units in total, are nearing completion with handover of the first tranche of units due before the end of February 2018 and most of the balance to be handed over in the first six months of the next financial year.

Memorial Parks
The Memorial Parks business substantially improved performance, increasing grave sales by 41.0% from the previous six-month period. "This business continues to grow, and we are pleased with the increased contribution of 3.2% it made to the Group's overall profits. With grave sales steadily increasing on a weekly basis, we are confident that the Memorial Parks business will begin contributing to profits in the full year, and is proof that our diversification strategy is starting to reap tangible benefits."

Lategan added that plans to expand the business into two more provinces are also under way. "It is critical for Memorial Parks to have a larger footprint across South Africa to enable the business to be linked to insurance policies that are sold. This will assist in unlocking and fast-tracking growth."

Looking ahead
Lategan said that going forward, the Group recognises that there will be a tightening of spend across the economy. "However, the need for housing and rental opportunities is vast and given the strong pipeline, Calgro M3 remains confident that the business remains in a strong position to continue selling housing units, while at the same time growing the rental business.

"The Memorial Parks business has shown improved growth and coupled with the marketing drive and
continued expansion, we are confident, will continue to show steady results and provide the Group with strong annuity income.

"End-user finance for our products may be at risk in future and the Group is working hard to find ways to mitigate this risk. We are, however, still able to secure 100% bonds for our clients across our products and banks have indicated that they do not foresee this changing soon."

The Group will continue to assess local and international markets to secure additional long-term instruments, as well as renew expiring facilities, but at this stage all indications are that sufficient funding will be available.

"With the construction and infrastructure currently being installed for 7 473 homes, the Group through its development business is not only assisting with the eradication of the housing backlog, but also assisting with job creation. Various training and skills development programmes have been launched and will be enhanced in the next six to twelve months to support the upliftment of the communities that we work in and drive sustainability in the medium to long term."