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Calgro M3 ‘deeply undervalued’

Two defensive businesses in large markets for free.

The market currently sees Calgro M3 at best as a property development company and at worst as a construction company.

In reality it is a defensive homebuilder with core defensive Memorial Park and Reit businesses, all operating in huge markets, says Keith McLachlan, fund manager at Alpha Wealth.

Calgro M3 is not cyclical like construction groups. At R14.01 per share on Monday, the housing business is fairly valued and the investor gets the Memorial Parks and Reit business for nothing, McLachlan says.

As a whole the group is “deeply undervalued”, he says.

In four to five years, these two “free” businesses will be equal in size to the housing business, if not bigger, he says.

The group on Monday reported a 16.7% increase in revenue for the year ended February 28 to R2.3 billion. Core headline earnings increased by 6.97% to 143.47c per share.

The share price increased by 2.86% by late afternoon.

Calgro M3 CEO Wikus Lategan said revenue slowed down in the second half of the reporting period as management slowed down operations to prevent undue pressure on working capital. It took longer than expected to secure additional working, risk and opportunity funding.

In November last year the group secured R278 million as the first tranche of international funding from Societe De Promotion Et De Participation Pour La Cooperation Economique SA, a subsidiary of Agence Française De Développement (AFD). The balance of R109 million is due to be released in June/July 2018, Lategan said.

During the year, Calgro M3’s housing development business had 8 564 units under construction. Of these, 3 426 were completed and handed over to its owners. About half of the balance of 5 138 should be handed over by the end of July.

A further 3 500 units have been sold and construction is imminent.

The total Residential Property Development pipeline consists of 54 376 units to the value of about R25.3 billion, Lategan said.

According to McLachlan the bulk of this pipeline will be executed over the next six years and that alone supports the current share evaluation.

Memorial Parks contributed 5.14% to group profit after tax, from a zero base. According to Lategan this is a high-growth business and the group hopes to increase its profit contribution to 10% in the next financial year.

Over the medium term the goal is equal contributions from all three businesses.

The group is rolling out its Memorial Parks countrywide and has made acquisitions in Cape Town and Bloemfontein to that end. The Eastern Cape and KwaZulu-Natal are next targeted for expansion.

McLachlan says the Memorial Park business is ramping up and could in four to five years be bigger than housing in Calgro. There is a shortage in the market for this product and a further shortage in quality product. He says this is a defensive business that provides annuity income, as is the residential rental investment (Reit) business.

The delivery of 3 852 rental units to the Afhco Calgro M3 Consortium is on track with the first 648 units handed over in November last year. Lategan says: “Indications, at this stage, are that we are on track to achieve the net property income yields in excess of 10.5% and a targeted rental escalation of 6% per annum which equates to approximately 20% return on equity in total, after gearing.”

This business will provide the group with annuity income for use as operating cash, Lategan said.

Calgro M3 estimates that there is a shortage of 1.5 million residential rental units in the country and plans to grow its investment in this sector to R5 billion.

McLachlan says Calgro M3 benefits from a smart, young, driven management team that is itself invested in the business. “They have been through the full cycle and know it is not only about growth, but also about mitigating risk and are playing in large, addressable markets.”

McLachlan says Alpha Wealth holds Calgro M3 in its small-caps fund, but did not want to divulge his valuation of the share.

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If McLachlan likes them so much, why did they reduce their holdings?

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