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Calgro M3 positions the group for growth, despite challenging market conditions

Highlights

  •  Remained a Level 1 B-BBEE contributor
  • Cash generated from operations R298 million
  • 4 436 units sold – construction to commence - R 1.7 billion excluding VAT
  • Conservative management estimated valuation of an additional R1.4 billion in tangible asset value locked in the balance sheet (Excluding joint venture interest and discounted by 30%). In addition, excludes 630 000 m2 commercial, industrial and retail land

Johannesburg, 13 May 2019: JSE-listed Calgro M3, the property and property-related investment company involved in Integrated Residential Developments, Residential Rental Investments and the development and management of Memorial Parks, today released financial results for the year ended 28 February 2019, declaring combined revenue of R1.3 billion.

According to Group CEO, Wikus Lategan, the year has been exceptionally difficult having to contend with a multitude of impacts, many outside the control of management. "These results were impacted by several operational challenges and transactions, coupled with changes in accounting standards," said Lategan.

The most prevalent items to impact the results include:

  • Scottsdene land invasion security cost and damages of R27.9 million
  • Fleurhof land invasion security cost and damages of R43.1 million
  • Fleurhof electrification standing time cost of R23.3 million
  • Cancellation of the Executive Share Scheme R43.9 million (with no cashflow impact)
  • IFRS 15 and IFRS 9 impact R56.2 million
  • La Vie Nouvelle net realisable value write-down of R54.0 million

Despite these difficulties, the group remains steadfast on transformation goals which go beyond compliance with legislation and regulation. "Our goal is to create a truly transformed organisation where people are empowered to fulfil their purpose." Given this dedication the group maintained a level 1 B-BBEE contributor status.

The implementation of Health, Safety and Environmental ("HSE") systems which align with ISO 14001 and ISO 45001 have progressed well during the year and the Group is readying itself for certification towards the end of the calendar year.

Lategan indicated that much time has been spent on positioning focused return areas comprising (1) a targeted return on equity ("ROE") of 30% over the medium to long term, (2) equal profit contribution from each of the three businesses and (3) securing an annuity income stream sufficient to cover all operating expenses for the Group.

Financial review

Revenue decreased by 42.78% to R997.1 million (2018: R1.7 billion) and combined revenue decreased by 44.82% to R1.3 billion(2018: R2.3 billion). If revenue was accounted for under the previous accounting standards, revenue would have been R1.1 billion, resulting in a 38.74% decrease from the R1.7 billion reported in the previous year. Combined revenue (under the previous accounting standards) decreased by 41.78% to R1.4 billion (2018: R2.3 billion) due to the slowdown in operations.

The main contributing projects to combined revenue were South Hills at 45.21% (2018: 41.88%), Belhar at 11.04% (2018: 13.35%) and Fleurhof at 25.65% (2018: 22.86%).

The gross profit margin of 12.91% was affected by several extraordinary items, namely:(1) IFRS 15 impact; (2) additional security on Fleurhof and Scottsdene; (3) standing time cost on Fleurhof; (4) variation order received on Fleurhof; and (5) net realisable value write-down on La Vie Nouvelle. On an adjusted basis this margin would have been 21.2%.

Basic earnings per share ("EPS") decreased by 97.31% to 2.53 cps (2018: 93.91 cps). Similarly, headline earnings per share ("HEPS") decreased by 121.09% to (19.01) cps (2018: 90.12 cps).

The increase in investment property, property, plant and equipment, investments (not for profit company/restricted investments), inventories and trade and other payables is due to the acquisition of the Durbanville and Avalon Memorial Parks. The Group acquired the remaining shareholding from the minority shareholder in Nasrec Memorial Park (36.5% shareholding) for R63.6 million during the year.

The Group made an additional investment into the Calgro M3 JCo Holdings (Pty) Ltd joint venture of R120 million for the purchase of the rental units in Ruimsig, Johannesburg. Lategan indicated that this is to cement the annuity income contribution to the group.

Athough cash flow from operations was positive by R298 million (2018: (R206 million)), it continued to be placed under pressure during the period due to challenges experienced on various projects. These challenges include the slower than anticipated handover of units to the REIT JV, the temporary slowdown/closure of the Fleurhof and Scottsdene projects and the associated security and repair costs required due to illegal invasions together with substantial delays in installing and registering water and electrical meters on units in Gauteng.

The board resolved not to declare a dividend, opting to retain the available cash to fund growth within the Group.

Operational Overview

The Residential Property Developments business, which is the largest contributor to Group operations, experienced an extremely tough year, exacerbated by a sluggish economy and political uncertainty. The Group had 10 projects in the ground, contributing to revenue which made the impact of the challenges more manageable. 4 436 units were sold with construction due to commence.

Sales continued to grow in the Memorial Parks business with the total sales increasing to R20.9 million (2018: R12.6 million) mainly due to the increased sales prices across the product range. Total cash received (including graves and other products excluding rental income and deferred sales) increasing to R28.8 million (2018: R14.9 million). Due to complicated accounting treatment for Memorial Parks, there is an impact created by deferred revenue.

Post the dissolution of the partnership with SA Corporate through their subsidiary Afhco, and the establishment of the Afhco Calgro M3 Consortium (a Real Estate Investment Trust ("REIT")), Calgro M3 managed to increase occupancy from 9% to 42% on the South Hills project, which it took over across just two months. "Tenanting in our Ruimsig project is also progressing well, with Scottsdene set to come on stream in the next few weeks, after the repair of units damaged by illegal invasions," Lategan explained.

The dissolution of the joint initiative was concluded in March 2019. Lategan explained that, "Despite this and in-line with the medium to long-term strategy, the Group remains committed to Residential Rental Investments to secure annuity revenue for use as operating cash across the Group."

Outlook

The focus for the year ahead is, foremost, to stabilise the Residential Property Development business so that a consistent stream of cash flow and profits can be attained. Focus will be dedicated to revenue and profit generation in a consistent manner. Lategan stressed that, "Should construction activity not improve to acceptable levels after the 2019 National Elections, further cost-cutting measures will be implemented."

The Group is currently investigating memorial parks in Tshwane and KwaZulu-Natal, one new residential development project as well as some potential properties to be acquired and developed for the Residential Rental Investment business. The internal focus is on rolling out the current projects in the pipeline.

The optimal application of capital between new opportunities, working capital and risk capital will remain an important strategic decision. Management places emphasis on cash flow generation from projects, as well as the preservation thereof for future use. The Group is cautious in the current uncertain environment and careful consideration will be given to what the best use of cash is on each project to ensure sustainable long-term return and value for shareholders.

In conclusion Lategan indicate that, "Memorial Parks and the Residential Rental Investments businesses are identified as areas with a particularly high growth opportunity which management is determined to accelerate. The group remains cautious, though optimistic, given the current uncertain environment and careful consideration will always be given to the best use and timing of capital allocation."