Property developer Calgro M3 reported a worse-than-expected financial performance for the year ended February 28, owing to challenging political and associated economic conditions, as well as delays in raising working capital.

“Our increased focus on the private sector within our residential property development business gave rise to higher working capital requirements that took longer to secure than initially expected,” said CEO Wikus Lategan.

The first funding was secured towards the end of November, but could not be invested and capitalised on immediately, owing to the December construction shutdown period.

Future working capital, required in the 2019 financial year, is on track and Calgro is securing longer-term working capital for use in 2020.

The company reported a 6.9% increase in core headline earnings to 143c a share and a 16.7% increase in revenue to R2.3-billion for the financial year under review.

Calgro’s financial performance was impacted on by the construction of units for the real estate investment trust joint venture in which Calgro has a 49% shareholding. This shareholding resulted in 49% of the development profit (construction and other services) being eliminated on consolidation as an unrealised profit.

The impact of this unrealised profit on the financial performance necessitated the institution of new metrics to measure operational performance between reporting periods, namely core headline earnings a share and core earnings a share – which is before elimination of unrealised profits.

Lategan said the current core headline earnings and revenue growth are testament to the effectiveness and resilience of the company’s strategy.

“Our performance proves that the variable operating model in place is efficient in uncertain times, as experienced during this financial year,” he stated.

During the year, 8 564 units and houses were under construction, of which 3 426 were completed and handed over to customers. Within the balance of 5 138, just over half are expected to be handed over before the end of July.

Calgro has about 3 500 units already sold, on which construction is imminent. The total residential property development pipeline comprises 54 376 opportunities with an unescalated revenue of R25.3-billion.

According to Lategan, the current share price levels are estimated to be at a discount to management’s valuation.

Lategan adds that the company is pleased with a diversified contribution to combined revenue, with South Hills surpassing Fleurhof as the main contributor in the year under review.

South Hills contributed 41.94% (2017: 19.00%) and Fleurhof 22.86% of revenue in the year under review. “We view this as extremely positive and it evidences our ability to consistently and sustainably deliver on these large-scale integrated projects.”

The Belhar and Scottsdene projects, in Cape Town, contributed 19.38% of revenue, despite a slowdown owing to the water crisis in the Western Cape.

“Construction at our first project in KwaZulu-Natal will start during the first quarter of the new financial year, while the long-awaited KwaNobuhle project, in the Eastern Cape, will start later in the year,” Lategan highlighted.

Calgro decided to discontinue the Leratong and Nelmapius projects, owing to a change in their risk profiles. In line with this risk mitigation strategy, the company also disposed of its 35% shareholding in the Otjomuise project, in Namibia.

Meanwhile, memorial parks contributed 5.14% to profit after tax, compared with 0% in the 2017 financial year.

Lategan said emphasis will be placed on growing this business in the next financial year to achieve an internal contribution goal of more than 10% of Calgro’s profit. With a target of equal profit contribution from all three businesses in the medium term, the company views memorial parks as a high-growth area.

“Our national roll-out plan is in progress and developing, supported through the acquisition of the Durbanville Memorial Park, in Cape Town, in March, and the Avalon Memorial Park, in Bloemfontein, which will be effective from June.

“The Eastern Cape and KwaZulu-Natal are targeted provinces for expansion, planned for later in the 2019 or early in the 2020 financial years,” Lategan elaborated.

Meanwhile, in terms of 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 during November.

The remaining units will be handed over in a staggered manner over the coming months, with Belhar delayed, owing to the slowdown associated with the water challenges in Cape Town.

“Indications, at this stage, are that we are on track to achieve net property income yields in excess of 10.5% and a targeted rental escalation of 6% a year, which equates to around 20% return on equity in total, after gearing,” Lategan noted.  

He added that, in line with the company’s medium to long-term strategy, it entered into this sector to secure annuity revenue for use as operating cash.

“In addition to this, we benefit from bulk infrastructure created previously, rather than having to create infrastructure each time a development commences.

“This strategy further assists government in eradicating the housing backlog without exposing the group to diminishing public sector spend,” Lategan noted.

In line with the diversification strategy, Calgro had entered into its first non-Calgro acquisition in Ruimsig, Gauteng, to the value of R402.4-million.

The focus of the residential property development business in the coming year will be to roll out the existing pipeline, capitalising on the private sector sales drive, enhancing the product offering, while simultaneously remaining focused on efficiency, said Lategan.

Moreover, the company’s estimations indicate a shortage of 1.5-million residential rental units in South Africa and this spurs Calgro to investigate other developments for acquisition opportunities. In doing so, the company remains committed to growing the investment pipeline to more than R5-billion.

“Calgro has a legacy of efficient capital allocation and despite a lull in the switch from private to public sector, we feel that sufficient working capital is in place to ensure good future roll-outs and continued income diversification for the group,” averred Lategan.

He concluded that the company’s strategy is to enable the extraction of multiple sources of revenue and profits from businesses and opportunities along the turnkey property development value chain, which will result in an improved operating margin blend and the creation of annuity income.

The optimal application of capital between new opportunities, working capital and risk capital will remain an important strategic decision as capital allocation across this horizontal value chain is made.