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Africa is not for us - Calgro M3

Building residential housing for low-income people may not seem like a path to riches, but the folks at Calgro M3 seem to be doing OK. They recently announced a multi-million dollar deal to build low-cost housing in Namibia, and have seen their share price jump as a consequence. Interestingly, however, Calgro business development director Derek Steyn says that, despite the lucrative Namibia contract, Calgro has no plans to expand into the rest of Africa. This is a little surprising, since it would seem like Sub-Saharan Africa would be an ideal market for Calgro, but Steyn is adamant that it won't be happening. Perhaps the risk of doing a large-scale project in frontier markets is too great, or perhaps Calgro is just happy to roll up its sleeves and work its way through the sizeable SA backlog of affordable housing projects. – FD

To watch this CNBC Power Lunch video click here

GUGULETHU MFUPHI: Presidential Project developer Calgro has been awarded a 73.3 million dollar housing project, which will see the group building more than 2500 housing units in Namibia.
Derek Steyn is the Business Development Director at Calgro. He joins us in our Cape Town studios for more. Derek, I understand that this is your first venture outside of the South African market: how did it come about? 

DEREK STEYN: That's correct. Let me put it this way: Calgro has a very strong pipeline and we never had the need to look outside the borders of South Africa. The Namibian project came along a couple of months ago and again, we had a look at it from a risk perspective and from a practical perspective, we liked the project, we've signed agreements, and we're ready to roll. We're going to be in the ground on the 1st of March.

ALEC HOGG: Your share price took an enormous jump in the last couple of days, Derek. What gives – what's the reason for that? Was it this transaction?

DEREK STEYN: Yes, I think so. I think it might be this transaction.

ALEC HOGG: It has now pushed you up to a big improvement in the last year – up by a third – and it's not the kind of share that on our radar: 888 million market cap. It's a nice number, by the way. If you go and market that to the Chinese, they'll buy your shares – big time. It is an interesting point to see that you are now finally starting to come onto the investor radar.

DEREK STEYN: Yes, we're really happy about it.

ALEC HOGG: What is your focus area? What is your unique selling proposition? We often ask Chief Executives of companies to tell us why investors should look at them rather than others.

DEREK STEYN: We focus on the low to medium residential income market, and we believe that the market is enormous. There are also not many players in our market, so we're sitting with quite a good market share in the lower income market.

GUGULETHU MFUPHI: Why the key focus there, Derek?

DEREK STEYN: We also have quite a big share in the middle to high-income market, but that market has been very dead since 2008. That market has gone into a major slump, whereas the low-income market is very active. It's not only government revenue; it's the private market revenue as well.

GUGULETHU MFUPHI: You've done this successfully in South Africa and now you're starting with Namibia. Is Africa your future growth story?

DEREK STEYN: No, for the short-term future, Namibia will be our only expansion outside the borders for now.

ALEC HOGG: Your BEE partner must be feeling a little bit sore, selling nearly 13 million rand's worth of shares at R6.40, just before the share price jumped like that. What's going on there? Are they divesting?

DEREK STEYN: Excuse me.

ALEC HOGG: Your BEE partner Planet Wave, sold 12.8 million rand's worth of shares this week at R6.40 per share.

DEREK STEYN: Yes, I believe so.

ALEC HOGG: What's the story there?

DEREK STEYN: No, there's no story. They've been invested in the business for over five years and I suppose they had to get out at some time.

ALEC HOGG: The timing is a little inopportune though, just before your share price jumps.

DEREK STEYN: Yes, I don't think they expected that. We also didn't expect that kind of jump to the R7.50/R7.49 market.

ALEC HOGG: Presumably, given the focus area that you're in, the increase in interest rates is not going to hurt you.

DEREK STEYN: No, interest rates never hurt us in this market. What happens is clients usually…all they do…with the interest rates going up, it means that their monthly income payments on the bond payments also go up. What our clients tend to do is they'll just buy down. They'll buy smaller units to stay within their affordability range.

GUGULETHU MFUPHI: From your booking perspective or your balance sheet perspective, have you protected yourself against the potential increase in interest rates?

DEREK STEYN: Yes, what we usually do is when there's an interest rate increase or building price increases, we are geared for that. As I said, the market is so enormous that the portion of the clients that actually fall out the bottom doesn't really affect our market. We're sitting with an immense market out there.

ALEC HOGG: Derek, you're entering a closed period at the end of this month on the 28th of February, so quite often we like to talk to guys before they get into the closed period. We have this opportunity with you now. Is there anything that investors are going to be unhappy about…anything you can tell us now before you go into a closed period?

DEREK STEYN: No, there's nothing that investors should be unhappy about, but I don't want to elaborate too much as we're a couple of days away from the financial year-end.

ALEC HOGG: You guys should take a tip from Investec. When they go into their closed period, they actually have an operational update. The 28th of February is the beginning of your closed period. It would be nice to have an update from you in the future. How long have you been listed as a company – on the JSE?

DEREK STEYN: We listed in 2007 on the AltX and in 2011 or 2012, we moved over to the main board.

ALEC HOGG: Have you found that investors have taken more interest since you moved to the main board?

DEREK STEYN: Yes definitely, the main board was quite a good move for us.

ALEC HOGG: Can you give us some insights on maybe what institutions have been acquiring your shares as a result?

DEREK STEYN: We have quite a few institutions. We don't have a big free float out there at this moment, so our shares are still tightly held by management, but we have many investors. Investec for instance, bought some shares not too long ago.