Hope amid the mud­dle

Finweek English Edition - - Marketplace Simon Says -

The Cal­gro M3* re­sults were very messy, mainly thanks to new IFRS 15 ac­count­ing method­ol­ogy that, while not chang­ing the fun­da­men­tals of the busi­ness sig­nif­i­cantly, changed how the homes de­vel­oper re­ports re­sults. One ex­am­ple is that the com­pany used to view a project as one and ac­count for earn­ings in a smoothed man­ner. Now it has to ac­count each unit in­di­vid­u­ally and they all have dif­fer­ent mar­gins, with some ac­tu­ally be­ing loss-mak­ing. This is be­cause, in or­der for the gov­ern­ment to fund bulk in­fras­truc­ture and trans­port, Cal­gro has to of­fer a num­ber of units at a lower in­come, which is at times done at a loss. Over­all, these losses are fine be­cause the in­fras­truc­ture en­ables Cal­gro to also build higher-mar­gin homes that more than off­set the loss-mak­ers. But it messes with re­sults: the com­pany has writ­ten back R317m of re­tained earn­ings that will come back to the in­come state­ment over the next three years. In­ter­est­ingly, the dis­counted value of the land the com­pany holds is worth about 950c a share, marginally be­low the cur­rent share price and pre­sent­ing an op­por­tu­nity for ex­po­sure to SA Inc – es­pe­cially with fur­ther price weak­ness.

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