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Diversification of income stream pays off for Calgro M3

Highlights

  • EBIT increased by 11,4% to R119,6 million (2015: R107,5 million)
  • Net cash generated from operations increased to R94 million (2015: R32,0 million)
  • Borrowings decreased to R525,5 million
  • No fatalities during the period
  • Net debt to equity 0,53 (2016: 0,59)
  • HEPS down 1,7% to 65,13c per share

Johannesburg, Monday 17 October 2016 – Calgro M3, the listed residential property and memorial parks developer, today announced interim results for the six months ended 31 August 2016, with an 82,5% improvement in operating profit and earnings before interest and tax up 11,4%.

Wikus Lategan, Managing Director of Calgro M3, says the results for the period are satisfactory given the unpredictable economic environment, the slowdown in the infrastructure investment by Government in the lead up to local municipal elections and the community unrest at certain projects.

"The Group's strategy to diversify within residential market sectors and its ability to timeously adapt to a changing environment is paying off and growth will be restored in the second half of the year," says Lategan.

In anticipation of a slowdown in infrastructure spend by Government, the Group increased its focus on the private sector during the period under review. The effect of which will only be seen the next 6 -18 months as these units are constructed. The Group also placed attention on cash preservation and concentrated on creating long-term investment opportunities that will ensure sustainable growth of the development business. It has also paid off the final instalment of the purchase price of R93 million for the flagship development, Fleurhof.
Towards the end of the reporting period, the Group announced the formation of a Real Estate Investment Trust in a joint venture with SA Corporate Real Estate.

These strategic diversification initiatives are in place to ensure annuity income and sustainability of the Group, Lategan explain. He went on to say, "Calgro M3 is passionate about making a meaningful difference. We believe that Government needs the assistance of the private sector to fulfil its mandate and for this reason Calgro M3 is assisting in the development of homes that can either be bought, rented or used by Government for fully subsidised or social housing. We are adamant that this is a formula that will benefit the country as a whole," said Lategan.

Financial review

Group revenue increased by 25,7% to R720,2 million (2015: R573,2 million) supported by Fleurhof being accounted for as a subsidiary of the Group. Combined revenue, however, decreased by 9,9% to R922,7 million mainly due to the slowdown in infrastructure investment and the community unrest at projects, especially South Hills which was brought to a complete standstill during the election period.

Operating profit for the period amounts to R114,4 million (2015: R62,7 million), mainly due to the inclusion of Fleurhof as a subsidiary and not being equity accounted anymore.

The 23,0% increase in operating expenses is overly inflated by non-recurring items such as a VAT penalty that is being disputed. This cost line increased further with outlays for the rebranding and marketing campaigns, targeted at the private segment of the market. The re-branding initiative has brought about an 80% increase in open market sales, the benefit of which will only be seen with the construction of these units over the next 6 – 18 months.

Basic earnings per share (EPS) remained relatively flat for the period, decreasing by 1,72% to 65,11 cents per share (2015: 66,25 cps). Similarly, headline earnings per share (HEPS) decreased by 1,69% to 65,13 cents per share (2015: 66,25 cps).

Management believes that the Group's current net debt to equity ratio of 0,53 (February 2016: 0,59) provides a good base with room to increase gearing to support the rollout of the pipeline and new investments.

Cash generated from operations experienced a healthy increased from R32,0 million to R94,2 million. The board decided not to declare an interim dividend, opting to retain available cash in the Group to steer growth.

Operating review

Property Developments

During the period, 4 542 houses were under construction, of which 1 272 were handed over to owners. An additional 5 239 opportunities are being serviced which will leave just over 10 000 serviced opportunities for future construction.

Ten out of the Group's 12 residential projects in the ground contributed to the revenue. Fleurhof remains the single largest contributor and flagship project, but other projects are starting to take their rightful place in contributing to the numbers.

The first two phases of Witpoortjie and La Vie Nouvelle's infrastructure services were completed. Top structure construction and infrastructure installation in various stages of completion are progressing well at South Hills, Summerset, Jabulani Hostels, Jabulani CBD, Scottsdene, Belhar, Brandwag and Otjomuise in Namibia.

Lategan explain that at the Vista Park and Leratong projects implementation delays are being experienced. "We are expecting that the Tanganani and Kwa Nobuhle projects will start with bulk infrastructure before the financial year-end. This will ensure that the Company is well positioned to mitigate, to some extent, the delays at Vista Park and Leratong," Lategan said.

Memorial Parks

Calgro M3 Memorial Parks made a small contribution to revenue and should start contributing to profits for the full financial year, boosted by the steady increase in the sales of burial sites and funeral policies.

The marketing and insurance partnership agreement announced in May 2016 with Conduit Capital and their insurance arm, Constantia, has already made a positive impact. The goal is to generate annuity income to compensate for lumpy development cash flows.

Effective October 2016, Calgro M3 acquired the Fourways Memorial Park, a private memorial park in Johannesburg.

Venture into REIT

Calgro M3 announced the formation of a Real Estate Investment Trust, a joint venture with SA Corporate Real Estate, in August to service the rental market in South Africa. This will secure annuity revenue and diversify Calgro M3's revenue streams. In the first phase of this initiative, AFHCO Calgro M3 (held 51% by SA Corporate and 49% by Calgro M3) will acquire new units to be developed by Calgro M3 in Johannesburg and Cape Town for a total consideration of R1,6 billion. It is the intention to grow the portfolio to reach property investments in the residential market across

South Africa of between R10 billion and R15 billion. This REIT controlled company is to target net property income yields of around 11%.
The first phase investment of R522 million will be funded from the Calgro M3 balance sheet.

Prospects

Lategan says with the new REIT investment as well as new infrastructure to commence in the second half of the year, the Group is on track with its strategy to diversify the income stream. "The Group remains committed to assist South Africa in eradicating the housing backlog and to ensure job creation, which in turn will drive economic growth."

"We remain extremely proud that the Group will launch various new training and skills development programmes over the next 6 - 12 months to add to the upliftment of communities that will drive sustainability in the medium to long term," Lategan concluded.