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Calgro M3 share price jumps 26%

Illegal invasions cost developer R65m.

The share price of real estate developer Calgro M3 jumped more than 26% on Monday to R9.50 despite its release of disappointing interim results.

The results reflect a R65 million cost due to land invasions, a R14.5 million standing cost due to electrification issues at its Fleurhof development and a fast-tracked expense of R44 million due to the cancellation of an executive share incentive scheme.

Combined, these matters had a pre-tax impact of R123.5 million, which is material for a group that recorded R1 billion in revenue in the previous period, Calgro CEO Wikus Lategan told Moneyweb.

Calgro’s Memorial Park business, however, is growing at an astonishing rate and delivering at an attractive margin.

Due to the adoption of new accounting standards, Calgro’s new set of results cannot be sensibly compared to previous sets.

However, the company stated that if the previous standards were applied, revenue would have shrunk by almost 35% to the recorded R657 million. Total comprehensive income was R29.7 million.

Administrative costs increased by 55% due to increases in marketing and advertising, wages, and professional fees. Calgro says in its results statement that it appointed additional senior management and professionals as well as health, safety and environmental staff, and site-based employees.

“Capacity building began in September 2017, leaving a mismatch between periods,” the group states. “Revenue has not yet evidenced a corresponding increase, due to the primary focus being placed on systems and efficiencies.”

Professional fees increased by more than 300% in relation to project management mentoring, land invasions as well as an electrical specialist for Fleurhof, the group said.

While Calgro hopes to recover about R57 million of the R65 million costs related to the invasion of its Fleurhof and Scottsdene developments (in Johannesburg and Cape Town respectively) through insurance claims, the opportunity cost of the capital tied up during the six-month site closures and the additional cost of working capital cannot be recovered.

Finance costs also escalated due to increased working capital requirements arising from the delays.

Both sites have now reopened.

The dispute with Johannesburg’s City Power about Calgro’s contribution to the cost of a new substation to service Fleurhof and surrounding areas has not yet been resolved. Lategan says the group is prepared to contribute to bulk services, but enjoys exemption where it develops subsidised housing, as in this case.

Read: Calgro’s Fleurhof housing project suffers from white elephant syndrome

He says much progress has, however, been made towards the resolution of the dispute and he expects it to be finalised within the next month or two.

Despite these issues, Calgro had 10 residential property development projects in the ground during the reporting period, with 5 279 units under construction and 1 843 units handed over.

Memorial Park sales grew by 128% with 649 grave and niche sites being sold in the six months to August 2018, compared to 947 for the whole previous financial year. The group acquired the Durbanville Memorial Park in Cape Town and the Avalon Memorial Park in Bloemfontein, and targets Tshwane and KwaZulu-Natal for expansion early in the 2020 financial year.

The uptake of rental units in the Afhco Calgro M3 Consortium – a real estate investment trust (Reit) joint venture (JV) – was slower than expected. Lategan says this was largely due to ongoing construction activities in later phases of the rental properties that deterred prospective clients.

He says the group has learnt from this and will arrange its operations differently in future. It has also renegotiated and extended the handover pace of the 480 units the Reit JV acquired from an external developer “to ensure effective tenanting”.

Looking into the future, Lategan says: “We’ve strategically aligned the group to ensure we remain committed and set to the targeted return on equity of 30% over the medium term – based on a residential property development pipeline of R25.3 billion, memorial parks pipeline increasing to R2.2 billion, and real estate investment with a targeted return on equity of 20.5%, amounting to the annual rental yield plus revaluation growth on an estimated group equity investment of R4 billion.”

Calgro is considering the sale or alternative use of some of the pockets of premium land it owns in the Fourways area in Johannesburg, Lategan tells Moneyweb.

He adds that Calgro is cautious in the current uncertain environment and will carefully consider what the best use of cash is on each project to ensure sustainable long-term return and value for shareholders. “We are expecting the effect of the challenges and delays to continue towards the end of the financial year,” he says.

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An informative and well researched article – but I also object to the choice of title. This share has a massive 20%-30% bid / offer spread, and reporting share price movements in this context is extremely misleading. Titles such as this falls into the same trap that Marketwatch reports fall into all the time (using price movement in their headlines) and when prices then move the other way (like the -15% movement in CGR immediately after your article), it tends to invalidate the article and its message.

Now on the subject of CGR, it is a stock that netted me over 700% growth while I owned it – so a great share and a great company who were able to accomplish what nobody else could – a workable business model in the low cost housing market.

My problem is whether they can continue to do so – given the funds drying up in government (read the Moneyweb Fleurhof article, for example) – and more importantly, their own guidance on strategic direction. Planning on selling insurance (BS in my opinion) and managing rentals (risky) to boost margins tells me that management has no real faith in their primary business model anymore.

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