Shares in JSE-listed Calgro M3 rocketed by 10.29% to a 15-month high on Monday after the residential and memorial parks developer reported a strong improvement in its financial results for the six months to August 2021.
Calgro’s share price closed at R4.50 per share on Monday, 86% higher than the company’s share price of R2.42 per share 14 days ago.
This was shortly before it released a trading update that disclosed its anticipated improved financial performance that led to its shares closing 42.46% higher on October 7 at R3.59.
The steep and sudden rally in Calgro’s share price also follows the company reporting in May it had returned to profitability in the year to February 28 2021 after three challenging years.
Calgro CEO Wikus Lategan said on Monday the company has completed its restructuring and is now focusing on growth.
“We see growth in the short to medium term coming from increased market share in both of the businesses, with operational efficiency initiatives aimed at expanding volumes, reducing costs and developing the required skills across all employee levels, remaining key focus areas across all operations,” he said.
Calgro on Monday reported a 45.6% rise in revenue to R576.2 million in the six months to August this year from R395.8 million in the prior period.
Operating profit increased to R81.67 million from the R27.19 million operating loss in the prior period as the gross profit margin improved to 19.7% from 7.9%.
Headline earnings per share grew by 262.8% to 42.79 cents from the 26.29 cents loss per share in the prior period.
Cash generated from operating activities improved to R133.2 million from R115.7 million.
A dividend was not declared.
Lategan said the continued successful implementation of the strategic decisions taken previously to refocus, restructure and return the business to sustainable profitability had produced the desired results.
“This performance definitely reflects our continued sales efforts and increased focus on brand awareness across both segments of the business, with the property development business contributing R545.7 million of total revenue,” he said.
Lategan said the gross margin reached a four-year high of 19.7% in the reporting period, compared with 7.9% at end-August 2020 and 12.3% at end-February 2021, which justified the earlier strategic decision to close and outsource the construction element of the business.
He said the gross profit margin is expected to continue strengthening to the historical range of 20% to 25% as even better operational efficiencies are achieved and higher margin units are delivered to customers.
Lategan said overhead costs decreased by 23% but are expected to increase slightly as more units are built and private sector marketing and brand building is undertaken.
Residential property development
The residential property development business now operates largely only in Gauteng and Western Cape and has a total of nine projects in the ground with about 5 000 opportunities currently under construction.
Lategan said this means the group remains well positioned to capitalise on the strong housing market and has sufficient working capital and pipeline opportunities.
Non-core projects and the remaining rental units in South Hills and Scottsdene will continue to be sold, with the proceeds used to further reduce debt.
Lategan stressed that Calgro will keep sales prices affordable and at a level where banks approve mostly 100% bonds.
He added that improved designs and layouts had resulted in Calgro increasing the number of opportunities in the Fleurhof, South Hills and Witpoortjie developments by more than 3 900 opportunities.
“No additional capital costs other than professional fees were incurred to achieve this. Future internal infrastructure costs were substantially reduced and this will enhance the gross profit margin over the next 18 to 36 months,” he said.
Lategan said the group has sufficient serviced and unserviced opportunities available across its projects to fuel growth for the foreseeable future without having to take excessive risks in acquiring new projects.
He said the current low interest rate environment will further enhance housing sales but the group remains cautious about the economic impact on its customer base of potential tighter credit criteria from banks.
Lategan said the memorial parks business continues to demonstrate substantial growth opportunities supported by an increase in total cash receipts during the period of 52.7% to R39.4 million from R25.8 million in the prior year.
He said there is strong demand for dignified and secure burial space, with the grave shortage estimated at about eight million graves over the next 15 to 20 years and the funeral insurance industry still growing rapidly.
He said Calgro has concluded a partnership with Nedbank whereby qualifying clients can secure a loan from Nedbank to purchase a grave.
“The national rollout and development of further land parcels within existing parks remains a priority with investigations ongoing,” he said. “The acquisition of new parks is, however, only planned for the next financial year.”
Company is an ‘attractive’ option
Rowan Goeller, an analyst at Chronux Research, said Calgro had produced very good results and appears to have stablised the business “quite nicely”.
Goeller said Calgro is attractive because the company now has a very nice pipeline of projects where it has already expensed a lot of the cost and the demand in its sector – the R500 000 to R1 million housing market – still seems to be very good and with reasonably limited infrastructure costs to sell those houses, resulting in “a fairly decent” profit margin.
He said Calgro’s plan is to be able to cover the group’s entire administration and running costs from the profit made by the memorial parks business.
“This is quite attractive, especially for a development company, which is a cash-hungry business in the long term,” he said.
“At least now they have a cash-generation business that is fairly stable in what it produces.”
Listen to Lategan’s SAFM MarketUpdate interview on the group’s interim results with Fifi Peters: