Calgro M3 is an interesting company that has just reported the third highest revenue number in its history for the year ended February 2022.
The main focus of the business is to build integrated residential developments that bridge the gap between subsidised social housing and affordable housing. In other words, these are low-cost developments that offer a dignified way to live, which is critical in the South African social landscape as so many of our people are still making their way along the LSM curve from levels of poverty.
The other part of the business builds memorial parks as an alternative to traditional cemeteries. Again, this has an important role to play in society. The Memorial Parks business is still small (under 4% of revenue) and grew by 23.1% in this period.
This is by no means an easy business to run in South Africa. The group has struggled to deliver value to shareholders, with a share price that is down 77% in the past five years. Importantly though, the share price has nearly doubled in the past 12 months!
For value investors and those who like turnaround stories, Calgro seems to be worth a look.
In the year ended February 2022, revenue jumped by over 50% and headline earnings per share (HEPS) swung beautifully into the green, with earnings of 105.63 cents vs. a headline loss of 15.17 cents in the prior year.
This earnings performance was assisted by the gross profit margin returning to its target range (21.3% vs. range of 20% – 25%), which means the core property development business is back to where it needs to be.
Return on equity (ROE) of 14.7% is a solid performance and makes the share price interesting, as it is trading at around half of the net asset value (NAV) per share. This means the effective ROE is closer to 30%.
In this environment, Calgro needs to focus on keeping prices of new units affordable and at a level where banks will approve 100% bonds. This certainly isn’t easy in an environment of inflation and rising interest rates, effectively a double-whammy negative impact on home affordability.
There’s no shortage of pipeline for Calgro. The residential property development pipeline has estimated revenue of R15.3 billion and the memorial parks pipeline suggests revenue of R2.1 billion. Of course, it takes a long time to realise the full potential of the properties and the key is to maximise margin while doing so.
The balance sheet has been improved considerably. R107.4 million in debt was repaid this year, with a closing balance of R850.6 million. Net debt to EBITDA has dropped to 0.71x , a return to 2018 levels after a peak in 2019 of 1.09x.
If you are interested in learning more about the company, register to attend the next Unlock the Stock event that I co-host with Mark Tobin and the team from Keyter Rech Investor Solutions. We will be hosting the management team at 12pm on Thursday 26th May for a presentation and Q&A session where retail investors (like you) can ask questions directly. This is a wonderful learning opportunity that gives you the kind of access to the management team that is usually reserved for sell-side analysts. Attendance for this online event is free and you need to register at this link.
