Outsourced construction contributes to Calgro M3’s highest profit margin achieved since 2017

Wikus Lategan, CEO of Calgro M3.
Wikus Lategan, CEO of Calgro M3.

Calgro M3 has released its results for the 6 months ended 31 August 2021, reporting an increase in its headline earnings per share by 262.8% to 42.79 cents per share (August 2020: 26.29 cents loss per share) and its earnings per share to 39.56 cents per share (August 2020: 30.46 cents loss per share).

The company’s balance sheet reflected an increase in revenue of 45.6% to R576.2 million compared to the R395.8 million reported in 2020.

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” commented Calgro M3 CEO, Wikus Lategan.

He added that with the gross margin having reached a four-year high of 19.7% (August 2020: 7.9%, and February 2020: 12.3%), this justified the earlier strategic decision to close and outsource the construction element of the business. The gross profit margin is expected to continue strengthening to the historical range of 20% – 25% as even better operational efficiencies are achieved, and higher margin units are delivered.

Overhead costs decreased by 23% and this cost is expected to increase slightly as more units are built and private sector marketing and brand building is undertaken.

Memorial Parks certainly played a part in these results, producing an increase of 52.7% in cash receipts. This demonstrated a further increase in market share and stable diversification in cash generation”.

Lategan says that it is important to note that the Memorial Parks business acts as an effective hedge against economic cycles and unforeseen events such as the pandemic. Total receipts generated from this business for the period was sufficient to cover the group’s administrative expenses.

The benefit of this over the long-term is that cash receipts from Memorial Parks should increase to such a level that it supports the group overheads and interest obligations”.

The continuous focus on liquidity management, resulting in strong cash generation, allowed us to execute on our short to medium-term strategic goal of reducing debt. This in turn led to lower interest repayments and which further bolstered earnings”.

This, coupled with the cash on hand of R215 million, resulted in a reduction in the net debt to equity ratio to 0.84:1, well ahead of our February 2022 target of 0.9:1”.

Our liquidity will be further enhanced with the sale of certain retail, commercial, and remaining rental properties as well as certain non-strategic projects, some of which are close to finalisation. In line with this, debt was reduced by R20 million with the proceeds from the disposal of the Tanganani project”.

Lategan also mentioned that the group does not use imported cement in their integrated developments, with regards to the recent announcement of the ban of the use of imported cement on state contracts, and the company’s fixed-price contracts that their main contractors have in place are long-term, being up to eighteen months.

Operational overview

Calgro M3’s residential property development business now operates mainly in Gauteng and the Western Cape, although it continues to trade out of KwaZulu-Natal, and it has a total of 9 projects on the ground. The business targets six distinct income groups that ensure that it is well diversified.

Revenue in this business grew by 44.9% to R545.7 million with its gross profit margin increasing to 17.5%. “This is the highest margin achieved since 2017 and an indication of our refocus on our core business, which included a move to outsourced construction”.

Around 5 000 opportunities are currently under construction, and this, together with meticulous capital allocation and a lower overhead structure, means that the group remains well positioned to capitalise on the strong housing market and it has sufficient working capital and pipeline opportunities”.

Non-core projects and remaining rental units in South Hills and Scottsdene will continue to be sold, while core projects returns are being maximized through town planning, better designs, and product enhancements catering for the more discerning clientele. “We are doing this while keeping sales prices affordable and at a level where banks approve mostly 100% bonds”.

With improved designs and layouts, Lategan said that the company increased the number of opportunities in the Fleurhof, South Hills, and Witpoortjie developments by more than 3 900. “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”.

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, and the current low interest rate environment will further enhance housing sales. We remain cautious of the economic impact on our customer base and the potential tighter credit criteria from banks”.

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 (August 2020: R25.8 million).

We introduced a new entry level product at the Nasrec Memorial Park, offering a grave for immediate burial for as low as R13 000. This diversification in the product offering has attracted a new market that could previously not afford a grave in this park, and it has resulted in an increase in the Gauteng market share during the period”.

The group has also concluded a partnership with Nedbank where qualifying clients can secure a loan from the bank to purchase a grave. “The national rollout and development of further land parcels within existing parks remain a priority with investigations ongoing. The acquisition of new parks, is however, only planned for the next financial year”.

Lategan said that the group is solidly positioned to capitalise on market demand with cash generation and careful capital allocation remaining its area of focus. “We will also continue to retain higher cash balances and available facilities. This more conservative approach will provide for a much more sustainable group that can weather economic conditions and unforeseeable events“.

He added that skills development, training, and education remain an imperative with additional initiatives underway.

Debt reduction remains a priority, without placing the operational business under too much pressure and this will most likely be done from the disposal of rental units or non-core projects, to continue de-risking the group.

We see growth in the short to medium-term, coming from increased market share in both 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”.