Calgro – standing on three solid legs

CALGRO M3 was established in 1995 and listed on the JSE in 2007. In the first four years, nothing much happened on the share price front, but at the end of 2011 a spectacular rise started, and in 2016 Calgro M3 was announced as the Sunday Times top company.

The awards acknowledge those companies with the highest shareholder returns over the past five years. Since listing, the share price increased by 850 percent, reaching a high above R20 a share in mid2016. It then declined to the current R13.50.

Calgro is a mixed-use housing developer, focusing on the full range of related disciplines, including the acquisition of land, town planning, architecture, project management of civil infrastructure, services installation, marketing and construction of homes, as well as the development of memorial parks. It has a unique turnkey business model and has three operating segments, namely property development, professional services and memorial parks.

Calgro used to be mainly a property developer, with their focus on the lower end of the residential market. They later successfully entered the private memorial parks business, and last year formed a real estate investment trust (Reit) in partnership with SA Corporate Real Estate.

There was also a calculated move away from government business to the private sector, which didn’t come without pain. Financing and timing of operating cash flow is a different ball game altogether.

The decision by the company to diversify into new areas is paying off, with the result that these two ancillary businesses may be larger than the original business within a few years. They offer great scope, and the company seems to be in a solid position, which promises impressive growth.

Chief executive Wikus Lategan previously said the company’s plan was to have three businesses that each contributed a third to earnings, thereby diversifying against the risks of operating only one business. These are its traditional home-building business, its investment in a Reit and its owning and managing of memorial parks.

Constraints

Weak economic conditions, market volatility and cash-flow constraints have weighed on Calgro M3’s performance. In March the company reported a 32 percent slump in headline earnings per share for the 12 months to end-February 2018.

It said the construction of units for its Reit joint venture also weighed on its results. Revenue increased by 12 percent, but did not flow through to the bottom line, due to changing accounting practices.

Memorial parks contributed 5.14 percent of group profit after tax, their first contribution to the company, which is expected to contribute 10 percent to profit after tax in the 2019 financial year. They acquired Durbanville Memorial Park in Cape Town in March 2018 and the Avalon Memorial Park in Bloemfontein in June.

The Eastern Cape and KwaZulu-Natal were targeted provinces for expansion, planned for 2019 and 2020.

The plan has been brought forward with the announcement of the expansion of its fledgeling memorial parks business to the Western Cape and Free State, bringing the number of sites owned and managed by the group to five.

Prospects

There are plans to keep expanding this hallowed niche into KwaZulu-Natal, the Eastern Cape and Tshwane.

The memorial parks business has a project pipeline of R2.2 billion and a targeted return on equity of more than 30 percent.

Calgro is hoping to capitalise further on its “death niche”, with plans to develop insurance-related products by partnering with insurance specialists. Funeral insurance is a vibrant business in SA, with estimates the industry is worth more than R7bn. The housing shortfall will not disappear shortly – in fact, it may increase.

The company has positioned itself well against a series of risks, and for more annuity income. It doesn’t face competition in the memorial parks industry. The Reit joint venture has good prospects; there is a significant demand for housing and Calgro can supply houses to this joint venture.

Amelia Morgenrood is a PSG Wealth financial adviser, based in Pretoria. The views are of the author and not necessarily the general view of the entire PSG entity. Calgro M3 shares are held in her own capacity and on behalf of clients.