Real estate developer Calgro M3 posted a weaker than expected financial performance for the fiscal year ended February 28, due to difficult political and economic conditions, as well as delays in mobilizing working capital.
âOur increased focus on the private sector within our residential real estate development business has resulted in higher working capital requirements which have taken longer to secure than initially anticipated,â said the CEO Wikus Lategan.
The first financing was obtained towards the end of November, but could not be invested and capitalized immediately, due to the December work stoppage period.
Future working capital, required in fiscal 2019, is on track and Calgro is securing longer term working capital for use in 2020.
The company reported a 6.9% increase in core profits to 143c per share and a 16.7% increase in revenues to R 2.3 billion for the year under review.
Calgro’s financial performance was impacted by the construction of units for the real estate investment trust joint venture in which Calgro has a 49% interest. This participation resulted in the elimination of 49% of the development result (construction and other services) in consolidation as an unrealized result.
The impact of this unrealized profit on financial performance necessitated the institution of new metrics to measure operational performance between reporting periods, namely overall earnings per share and earnings per share – which is before elimination of earnings latent.
Lategan said the top earnings and current revenue growth is a testament to the effectiveness and resilience of the company’s strategy.
“Our performance proves that the variable operating model in place is effective in times of uncertainty, as has been experienced during this fiscal year,” he said.
During the year, 8,564 housing units and houses were under construction, of which 3,426 were completed and delivered to customers. Of the balance of 5,138, just over half are expected to be delivered before the end of July.
Calgro has approximately 3,500 units already sold and construction is imminent. The total residential real estate development pipeline comprises 54,376 opportunities with non-indexed revenue of R25.3 billion.
According to Lategan, current levels of stock prices are estimated at a discount from management’s assessment.
Lategan adds that the company is pleased with a diversified contribution to combined sales, with South Hills overtaking Fleurhof as the main contributor in the year under review.
South Hills contributed 41.94% (2017: 19.00%) and Fleurhof 22.86% of the turnover for the year under review. âWe see this as extremely positive and it demonstrates our ability to consistently and sustainably deliver these large-scale integrated projects. “
The Belhar and Scottsdene projects in Cape Town contributed 19.38% of sales, despite a slowdown due to the water crisis in the Western Cape.
âConstruction on our first project in KwaZulu-Natal will begin in the first quarter of the new fiscal year, while the long-awaited KwaNobuhle project in the Eastern Cape will begin later this year,â said Lategan.
Calgro decided to stop the Leratong and Nelmapius projects, due to a change in their risk profiles. In line with this risk mitigation strategy, the company also sold its 35% stake in the Otjomuise project in Namibia.
Memorial parks contribute 5.14% of the result after tax, against 0% for the 2017 financial year.
Lategan said the focus will be on growing this business over the next fiscal year to achieve an internal contribution target of more than 10% of Calgro’s earnings. With an objective of equal profit contribution from all three companies over the medium term, the company sees memorial parks as a high growth area.
âOur national roll-out plan is ongoing and in development, supported by the acquisition of Durbanville Memorial Park, Cape Town, in March, and Avalon Memorial Park, Bloemfontein, which will be effective from June.
“The Eastern Cape and KwaZulu-Natal are provinces targeted for expansion, expected later in 2019 or early in fiscal 2020,” explained Lategan.
Meanwhile, with regard to Calgro’s residential rental investments, the company reported that of the 3,852 units in the first tranche, 648 were completed and handed over to the Afhco Calgro M3 Consortium in November.
The remaining units will be delivered on a phased basis over the next few months, with Belhar delayed, due to the slowdown related to the water challenges in Cape Town.
âThe indications at this point are that we are on track to achieve net real estate income returns above 10.5% and a targeted rent increase of 6% per annum, which equates to approximately 20% of return on total equity, after leverage, ânoted Lategan.
He added that, in line with the company’s medium and long term strategy, it entered this industry to secure annuity income to be used as operating cash.
âOn top of that, we get the benefit of a mass infrastructure created previously, rather than having to create an infrastructure every time a development begins.
“This strategy further assists the government in eliminating the housing backlog without exposing the group to reduced public sector spending,” noted Lategan.
In line with the diversification strategy, Calgro had completed its first non-Calgro acquisition in Ruimsig, Gauteng, valued at R 402.4 million.
The objective of the residential real estate development activity over the coming year will be to roll out the existing pipeline, capitalizing on private sector sales dynamics, improving the product offering, while remaining focused on efficiency, said Lategan.
Additionally, the company’s estimates point to a shortage of 1.5 million residential rental units in South Africa, prompting Calgro to seek further developments for acquisition opportunities. In doing so, the company remains committed to expanding the investment pipeline to over R5 billion.
âCalgro has a legacy of efficient capital allocation and despite a lull in the transition from the private sector to the public sector, we believe that sufficient working capital is in place to ensure good future deployments and continued revenue diversification for the group, âLategan said.
He concluded that the company’s strategy is to enable the extraction of multiple sources of income and profit from businesses and opportunities throughout the turnkey real estate development value chain, which is result in improved operating margin and annuity income generation.
The optimal application of capital between new opportunities, working capital and venture capital will remain an important strategic decision as the allocation of capital is made in this horizontal value chain.