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Strategic repositioning pays off for Calgro M3

Highlights

  • Revenue increased 29,12% to R1,6 billion (2016: R1,2 billion)
  • Gross profit margin constant at 21.49% (2016: 20.89%)
  • No fatalities during the year
  • NAV per share up 23,78% to 798,35c (2016: 645,00c)
  • Cash on hand increased by 200,69% to R240,8 million (2016: R80,1 million)
  • Net debt to equity 41,82% (2016: 59,30%)
  • HEPS declined 4,23% to 133,08 cps (2016: 138,96 cps)

Johannesburg, 15 May 2017 – Calgro M3, the listed property developer, involved in large scale Integrated Residential Developments, Real Estate Investments (rental units) and private Memorial Parks, today announced an increase in revenue of 29,12% to R1,6 billion for the year ending 28 February 2017 from R1,2 billion in the previous year.

Operating profit increased to R228,965 million from R160,167 million in the previous year, whilst HEPS decreased with 4,23 % to 133,08c per share (138,96c).
Wikus Lategan, CEO of Calgro M3, says a challenging year was experienced, but it has focussed on strategic repositioning of the Group in anticipation of tough economic conditions. “The group focussed on diversifying into other sectors within the Integrated Residential Development business, as well as Memorial Parks and the Real Estate Investment Trust (REIT) to mitigate risk, ensure annuity income and position a solid foundation for future growth.” Calgro M3 remained focussed on maintaining the underlying theme of property development that is synonymous with the business.

“The goal of is an equal profit contribution from all three businesses,” says Lategan.

The emphasis in the year under review was on the effective roll-out of the current project pipeline, rather than growing it. New ground-breaking projects are being explored as well as innovative ways of acquiring these properties and projects without large upfront capital investment that is usually associated with a traditional outright purchase, says Lategan.

Financial review
A portion of the 29,12% increase in revenue to R1,6 billion is due to Fleurhof Ext 2 (Pty) Ltd being accounted for as a subsidiary of the Group and no longer as a joint venture. The effect of the consolidation is an increase in revenue, cost of sales and gross profit of the Group, as well as a decrease in share of profits from joint ventures and associates.

The increased focus on the private sector has resulted in a temporary delay in combined revenue and profit as the Group does not start construction on any open market units unless they are sold. Combined revenue decreased by 13,23% during the year, evidencing the slowdown in operations, especially infrastructure expenditure that generally represents a large portion of revenue.

Administrative expenses increased by 12.38% from the prior year to R118.1 million (2016: R105.1 million). The main increase relates to marketing and advertising expenditure. The increase in marketing costs is supported by an increased focus on open market sales and includes activities such as rebranding, the Captain Calgro educational campaign, a 24/7 call centre for marketing and after sales support, focused marketing for Memorial Parks and the establishment of an in-house marketing department to complement the existing sales department.

Finance income declined in the current year mainly due to the consolidation of Fleurhof into the Group. Total finance costs for the year increased by 9,62% to R65,2 million (2016: R59,4 million) in line with increases in borrowings and interest rates.

Cash and cash equivalents increased significantly by 200,69% from the previous year. Net cash generated from operating activities increased to R238,2 million from R35,5 million in 2016. With several cash positive projects, the Group could fund the purchase of Fleurhof Ext 2 (Pty) Ltd, as well as continue the construction of the open market units without increasing its borrowing requirements substantially.

The Company has not declared a final dividend, opting to retain the available cash to fund growth within the Group.

Operating review
Property developments
The Group’s marketing efforts resulted in an increase of 31,5% in open market sales. However, this does not reflect in the current revenue and profit lines as construction of most of these units only started, on a staggered basis, from August 2016. It is expected that most this revenue will be reflected over the next six to twelve months as the Group does not take construction risk on unsold units.

The Group currently has more than 7 000 units under construction. To manage risk and exposure, infrastructure installation during the 2017 financial year was contained to 5 239 opportunities. This results in the total number of available, serviced opportunities being in excess of 8 000. The Group will continue to prioritise the installation of new infrastructure in the 2018 financial year to ensure sustained growth in the future.

In line with the Groups strategic objectives, it focussed on the development of the historic cluster properties to ensure funds are unlocked that can be invested into large scale integrated developments that will produce and increased yield.

Exposure to the KwaZulu-Natal market was gained through the launch and approval of the Bridge City project.

Ten of the thirteen of residential projects contributed towards the Group’s revenue. While Fleurhof made the single biggest contribution, the newer projects are starting to make a meaningful contribution and thus further support diversification.

The Group has also managed to create critical scale in the construction of units to the private sector through the development of the phase 1 units for the REIT.

Memorial Parks
Memorial Parks continued to grow, generating a profit for the 2017 financial year, with grave sales steadily increasing on a weekly basis. Management is positive that this business will begin making a more substantial contribution to profits in future financial years. A call centre concentrating primarily on sales is close to being established, and is expected to be operational by June 2017.

The acquisition of Fourways Memorial Park assisted with unlocking and fast-tracking growth in this segment. Fourways Memorial Park has 13 103 burial sites remaining with an expected average sales price of R30 000 per grave.

The company is confident that the Memorial Parks business will continue to show steady results and provide the Group with strong annuity income.
The Group plans to add two to three new memorial parks soon.

Prospects
Given the recent sovereign downgrades Calgro M3 is investigating various options to assist customers in securing deposits as it is possible that the banks may institute the call for upfront deposits, which the typical Calgro M3 customer will not be able to fund.

Despite the expected tightening of spend across the economy, Calgro M3 remains confident that the business remains in a strong position to continue to sell housing and growing the rental business, given the need for housing and rental opportunities.

With construction and infrastructure currently being installed for nearly 7 000 homes, the Group is not only assisting with the eradication of the housing backlog, but also assisting with job creation. “In the next six to twelve months the group will launch various training and skills development programmes to support the upliftment of even more of our people and to drive sustainability in the medium to long term,” Lategan indicating.

In conclusion, he indicated that the repositioning during the year was to ensure that risk is optimally mitigated and managed in these uncertain times, setting a solid foundation for future growth.