Calgro M3 shares peak after Hollard partnership

Posted On Monday, 13 July 2015 17:30 Published by
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Hybrid property developer and construction company Calgro M3, now bigger than Aveng, continues to shine in an industry few investors are willing to bet their money on.

 Wikus Lategan

This week, the developer of integrated residential housing, which took the unconventional route of entering the funeral industry in May, announced that it had partnered with Hollard Insurance to provide funeral policies for burials at its new memorial park in Nasrec, south of Johannesburg. The share price shot above R20 for the first time after Monday’s announcement and has remained in record territory throughout the week.

Integrated residential developments attempt to create a community that merges higher-income earners, who can afford bonded houses up to the value of R3m, with lower-income earners, who receive partial or fully government subsidised houses. At yesterday’s close Calgro M3 had pared gains, slipping 0.44% to R20.30, valuing the company at about R2.58bn, bigger than Aveng’s R2.45bn and not far from Group Five’s market capitalisation of R2.78bn. Although it is grouped under the same umbrella as other construction companies on the JSE, MD Wikus Lategan describes Calgro M3 differently.

“We are a property developer that happens to undertake its own construction,” he says. He says Calgro was placed in the construction index when it listed in 2007 as the local bourse does not have an index that accommodates such a hybrid. The company migrated onto the main board in 2012. Calgro’s business model is centred around a “turnkey approach” in which it is the landowner, developer, contractor and marketer of its own houses. This approach reduces costs and secures higher margins. For many years the market has misunderstood Calgro M3’s business model, says Alpha Wealth Fund Manager Keith McLachlan. “They have either viewed it as a construction company, which it isn’t, or a property developer and it is neither of those,” he says.

“Ultimately, what Calgro M3 provides is shelter and as stated in Maslow’s hierarchy of needs, everyone needs a home.” Estimates put the shortage of affordable homes (those ranging from R300,000 to R620,000) at 700,000 units in SA, Calgro says on its website. This market is expected to grow by 100,000 units each year. Unlike other construction companies, Calgro does not have a lot of employees on its books, according to Thebe stockbroking senior research analyst Janine Weilbach. “They sub-contract their builders only after a project has been zoned,” she says.

This means the company does not have to pay idle staff while management tenders for new projects. And because it does not invest a lot in big building machinery, which often also sits idle while work is being tendered for, depreciation costs are low, she adds. About 80% of Calgro’s revenue comes from integrated social housing and the rest from mid to higher residential houses. The group has developments in Fleurhof, Jabulani, South Hills, Scottsdene and Belhar. Last year, Calgro entered Namibia’s housing market through a joint venture but says it has no current plans to expand further on the continent. Market concerns that the company’s business is skewed towards providing government social housing and is therefore at risk in the likely occurrence of payment being delayed are illinformed says Mr Lategan.

“Government only accounts for some 33% of our business in terms of volumes,” he says. “On a value basis … low-cost housing for the state contributes some 16% of Calgro’s revenue.” SA’s Breaking New Ground housing backlog is estimated at more than 2.1-million houses. The government says it wishes to eradicate the backlog by 2030. Since listing, Calgro has not paid a dividend to shareholders, despite making profits five years in a row. There are no signs the company plans on changing this policy any time soon.“With a pipeline in excess of R19bn, and with projects in the wings waiting to be finalised, we believe that for the foreseeable future we will need to keep the company capitalised with profits earned,” says Mr Lategan.

Source: BD

Last modified on Monday, 13 July 2015 20:44

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