Calgro M3 — Earnings underpinned by gross profit margin

Research: Real Estate

Calgro M3 — Earnings underpinned by gross profit margin

Calgro M3’s core business is integrated residential housing development and memorial parks. In the six months to August 2024, the company posted a 28.5% increase in EPS to 101.4 cents, which also represented a three-year EPS compound annual growth rate (CAGR) of 37%. This was supported by a strong gross profit margin of 29.7%, a 383% increase in the share of profits from joint ventures and a 2% decrease in admin costs. Group revenue declined by 26.4% to ZAR507m, compared to H123, but the gross profit margin, which exceeded the target range of 20–25%, offset the decline in revenue. The net asset value (NAV) increased by 6.9% to ZAR14.3 per share, resulting in a price-to-book ratio of 0.5x. Calgro M3’s NAV recorded a three-year CAGR of 26% to August 2024. The company is trading at a historical P/E of 3.9x.

Real Estate

Calgro M3

Earnings underpinned by gross profit margin

Real estate

QuickView

15 October 2024

Price

ZAR6.75

Market cap

ZAR648m

Share price graph

Share details

Code

CGR

Listing

JSE

Shares in issue

96.06m

Business description

Calgro M3 specialises in integrated residential housing development and memorial parks. The company was established in 1995. It generates the bulk of its revenue from the Gauteng and Western Cape provinces, the largest contributors to South Africa’s gross domestic product.

Bull

Strong revenue pipeline, with 1,539 units under construction and 37,154 additional opportunities.

Strong gross profit margins underpinned by lower historical land and infrastructure costs.

The shares trading at a price-to-book ratio of 0.5x.

Bear

High interest rates in South Africa are negative for the residential property market.

Group gross profit margin is elevated, likely to decline in future.

Cyclical nature of the property development business.

Analyst

Thobelani Maphumulo

+44 (0)20 3077 5700

Calgro M3’s core business is integrated residential housing development and memorial parks. In the six months to August 2024, the company posted a 28.5% increase in EPS to 101.4 cents, which also represented a three-year EPS compound annual growth rate (CAGR) of 37%. This was supported by a strong gross profit margin of 29.7%, a 383% increase in the share of profits from joint ventures and a 2% decrease in admin costs. Group revenue declined by 26.4% to ZAR507m, compared to H123, but the gross profit margin, which exceeded the target range of 20–25%, offset the decline in revenue. The net asset value (NAV) increased by 6.9% to ZAR14.3 per share, resulting in a price-to-book ratio of 0.5x. Calgro M3’s NAV recorded a three-year CAGR of 26% to August 2024. The company is trading at a historical P/E of 3.9x.

Memorial parks gain decent traction

Calgro M3’s residential property development segment posted ZAR475m in revenue, significantly lower than H123 (ZAR669m). The demand for residential units was adversely affected by weak consumer demand and delayed transfers. The number of units handed over dropped by 27% to 869 units. By contrast, the South Hills joint venture posted a revenue increase of 660.8% to ZAR175m, underpinning a 383% jump in the share of profits from joint ventures to ZAR20m. The residential property development segment, which accounted for 93.7% of group revenue, and memorial parks, which contributed 6.3% to group revenue, recorded 27.7% and 57.8% gross profit margins, respectively. Gross profit margins benefited from a higher share of non-public sector units and lower historical land and infrastructure costs. Meanwhile, the memorial parks segment’s revenue increased by 59.0% to ZAR32m. The lay-by option continues to gain traction with an active book of ZAR42m, which will be converted to sales once outstanding amounts are fully settled.

Loan-to-value ratio is low relative to property sector

In H124, Calgro M3’s net debt-to-equity ratio and the debt service coverage ratio were 0.63x and 3.4x, respectively. The company’s borrowing increased marginally to ZAR1bn, from ZAR935m in February 2024 due to the ZAR100m drawdown from the Absa Group facility to prepare for the Bankenveld land transfer. The balance sheet remains strong, with a loan-to-value ratio of 30.4%, which is below the listed property sector average of 40%. Net cash generated from operating activities fell to ZAR28m, from ZAR91m, largely because of finance cost paid. Calgro M3 has ZAR211m of debt maturing at the end of FY25 but ZAR50m was settled in September 2024, according to management.

Historical financials

Half-year

Revenue
(ZARm)

Profit after tax (ZARm)

EPS*
(c)

NAV per share (ZAR)

P/NAV
(x)

Dividend yield** (%)

08/21

576.2

47.9

39.6

7.2

0.9

0.0

08/22

607.0

69.2

57.0

8.5

0.8

0.0

08/23

688.9

84.8

78.9

13.4

0.5

0.0

08/24

507.0

97.6

101.4

14.3

0.5

0.0

Source: Company financial reports. Note: *Basic earnings per share. **Dividends paid at year end (5% of HEPS).

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General disclaimer and copyright

This report has been prepared and issued by Edison. Edison Investment Research standard fees are £60,000 pa for the production and broad dissemination of a detailed note (Outlook) following by regular (typically quarterly) update notes. Fees are paid upfront in cash without recourse. Edison may seek additional fees for the provision of roadshows and related IR services for the client but does not get remunerated for any investment banking services. We never take payment in stock, options or warrants for any of our services.

Accuracy of content: All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report and have not sought for this information to be independently verified. Opinions contained in this report represent those of the research department of Edison at the time of publication. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations.

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No personalised advice: The information that we provide should not be construed in any manner whatsoever as, personalised advice. Also, the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. The securities described in the report may not be eligible for sale in all jurisdictions or to certain categories of investors.

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Copyright: Copyright 2024 Edison Investment Research Limited (Edison).

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The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (i.e. without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision.

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This document is prepared and provided by Edison for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document. A marketing communication under FCA Rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research.

This Communication is being distributed in the United Kingdom and is directed only at (i) persons having professional experience in matters relating to investments, i.e. investment professionals within the meaning of Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005, as amended (the "FPO") (ii) high net-worth companies, unincorporated associations or other bodies within the meaning of Article 49 of the FPO and (iii) persons to whom it is otherwise lawful to distribute it. The investment or investment activity to which this document relates is available only to such persons. It is not intended that this document be distributed or passed on, directly or indirectly, to any other class of persons and in any event and under no circumstances should persons of any other description rely on or act upon the contents of this document.

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Edison relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940 and corresponding state securities laws. This report is a bona fide publication of general and regular circulation offering impersonal investment-related advice, not tailored to a specific investment portfolio or the needs of current and/or prospective subscribers. As such, Edison does not offer or provide personal advice and the research provided is for informational purposes only. No mention of a particular security in this report constitutes a recommendation to buy, sell or hold that or any security, or that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person.

London │ New York │ Frankfurt

20 Red Lion Street

London, WC1R 4PS

United Kingdom

London │ New York │ Frankfurt

20 Red Lion Street

London, WC1R 4PS

United Kingdom

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