JSE-listed Calgro M3 has released its financial results for the six months ended 31 August 2019. The Group’s intense focus on cash flow generation and cash preservation during the period has paid off, as it reported cash generated from operations increasing to R449.5 million.
“During these difficult economic times, we managed to stabilise our cash flow through various debtor and progress draw recoveries, which enabled us to support ourselves without having to sell off any of our assets outside of the ordinary course of business. A decision was also taken to suspend work on various developments which resulted in additional costs being incurred. As anticipated, reducing operations to an extremely low level impacted gross profit, but we believe these decisions will ensure the overall sustainability of the Group and mitigate any risks associated with unplanned delays and stoppages on major projects,” said Calgro M3 CEO, Wikus Lategan.
He said that the Group counted other successes during the period as being:
- the construction of the Fleurhof substation getting underway, with an anticipated completion date of August 2020;
- the illegal invasion of Scottsdene being resolved and no other Calgro M3 units are currently illegally occupied;
- Calgro M3 received the Top Empowerment Award in recognition of its contribution to growth and sustainability;
- the Group also received the Sustainable City’s and Human Settlements Award from the UN; and
- securing the Frankenwald development.
The deliberate slowdown in operations across all development sites resulted in revenue for the six months ended 31 August 2019 decreasing by 17.2% to R520.8 million (2018: R628.6 million) and combined revenue decreasing by 26.4% to R579.5 million (2018: R787.3 million). As mentioned, costs associated with low levels of activity resulted in the gross profit margin coming under pressure, decreasing to 7.6% (2018: 16.6%). Without these costs, the gross profit margin would have been 16.3%.
“The lower margin is also attributable in part to IFRS 15, which must be
kept in mind when looking at our historical 20% to 25% margins.”
Insurance claims amounting to R16.4 million were recovered from SASRIA, with claims totalling R34.5 million still under assessment. Basic earnings per share decreased by 106.1% to a loss of 1.46 cents (2018: 23.78 cents profit). Similarly, headline earnings per share decreased by 204.2% to a loss of 3.24 cents (2018: 3.11 cents profit). The positive cash generated from operations of R449.5 million was as a result of the receipt of outstanding invoices and progress draw recoveries, primarily from the public sector. The net cash generated resulted in the construction contracts and trade and other receivables balances decreasing by 35.2% on a combined basis.
The group’s residential property development business is well positioned to recommence construction and increase capacity on a number of projects, with 7,837 fully serviced opportunities available for development as well as 3,317 units already under construction at various stages of completion.
“We are aiming to complete around 2,000 units for the 2020 financial year and commence/recommence construction on another 2,253 units in the second half of the 2020 financial year, cash flow permitting. Based on the estimated timing for completion, we will have sufficient working capital available to start the additional units without raising additional working capital in the short term.”
Lategan added that the business would remain focused on rolling out its current pipeline in the most efficient and effective manner possible: “With our clientèle becoming more discerning over the last few years, our focus remains on enhancing our product offering, while keeping the sales price as low as possible. We strive to deliver products and services to our customers that are superior in the market and which hold good value-for-money.”
The group managed to secure the Frankenwald property in equal partnership with another developer on an annual option fee basis for the next four years. Frankenwald is the last remaining large-scale property in the greater Sandton area and is situated next to Alexandra and the Marlboro Gautrain station. The development will yield between approximately 40,000 and 50,000 residential opportunities after densification of the current rights. No material financial commitments on this project are planned for the next four years, while the group executes on its current pipeline.
“With enough serviced opportunities available, we’ve decided to only develop new integrated development infrastructure should Government funding become available. In the interim, we will remain focused on cash preservation and the delivery of completed units,” said Lategan.
Budget for civil infrastructure has been approved on the South Hills, Jabulani and Vista Park developments. The electrification budget for the Fleurhof substation has been approved and the electrification budgets across all other projects are being monitored closely.
“The group is exploring the sale of all rental units as part of the normal operations of the development business in order to generate cash flow to settle debt in the short term. This period of zero capital redemption will substantially lower associated risks and provide the residential property development and Memorial Parks businesses with the ability to utilise working capital in a more efficient manner to generate sufficient returns to allow the revival of this business much more aggressively in the future.”
Lategan added that Calgro M3 remains bullish on growth opportunities in its Memorial Parks business and its ability to match the profitability of the property development business in the medium to long term. The current areas of focus, in order to achieve this goal, are establishing a national footprint and enhancing sales distribution through various channels.
Sales for the period were under pressure as a result of declining customer affordability levels and lower than expected sales throughout the winter months. Total revenue for the period decreased by 7.3% to R11 million (2018: R11.9 million), with total grave sales declining by 15.4% to 473 graves (2018: 559 graves). Extended payment options are also offered to clients (at no interest, or additional fees), with up to twelve months to pay. Total sales sold on deferred payment terms, for which no revenue is recognised, amounts to 62 graves, totalling R2 million in sales.
Due to the decline in sales, the group instituted various corrective measures to ensure that the business returns to high levels of growth. Additional sales agents and sales managers were appointed, while the new Group Head of Marketing and Sales was seconded to work exclusively on the Memorial Parks business until a turnaround is achieved. Further interventions include focused marketing campaigns and special pricing options.
Management has an estimated valuation of R520.3 million on this business based on the exit value of the Nasrec Joint Venture partner interest during the previous financial year. In terms of its residential rental investments, Lategan explained that Calgro M3 had entered the rental sector to secure annuity income to boost operating cash flow across the group.
“The medium-to long-term strategy of this business also includes an equal profit contribution to that of the property development and Memorial Parks businesses. The Group will, however, not invest into this business in the short term due to the capital intensive nature of the business.”
Lategan commented: “We will remain focused on our core business of specialising in property and property-related activities, as well as cash flow generation, to enable the group to manage external influences outside of its control more efficiently. However, for the next six months, our key focus will be to continue to manage liquidity, by giving careful consideration to the best use of the group’s cash on each project, and looking at any downside risks, given the current instability and uncertainty of the South African economic and political climate, which is expected to remain protracted.”
Despite the challenges being faced by the Group, Calgro M3 remains confident in the long-term growth and potential in the South African market and once the economic climate recovers to a higher growth environment, the Group will be able to capitalise on being a first mover to market.