Calgro M3 - an undiscovered gem?

Calgro M3 as covered by community member Letitia Janse van Vuuren.

Key Data

Share Code: CGR

Share Price: 312c

Sector: Construction & materials

Market Cap: R419m

25 Wk H/L: 398c/241c

P/E Ratio: 2.55

Latest annual updates:

Revenue: +15% to R1.525bn

EPS: +41.3% to 153.37 cps

NAV per share: +19.8% to R9.51

Operating Cash Flow: R2.1m

D/E Ratio: -12.7% to 0.62

Gross profit: +2.2% to 23.5%

Dividend: None

Calgro 101

Calgro M3 is a leading residential property developer that specialises in providing housing, schooling and communal facilities to all levels of income earners. In addition to their integrated developments, the company also owns and manages serene memorial parks, offering a peaceful environment for families to lay their loved ones to rest.

Segment 1: Property Development

The property development segment generates a revenue of R1.49 billion, representing approximately 98% of the total revenue. Calgros operations are focused mainly in Gauteng and the Western Cape.

Currently, they have nine active projects catering to various income levels, ranging from fully subsidised units to mid-to-high income housing priced up to R3 million. However, their main focus is on the lower LSM (living standard measure) market, offering units ranging from R400 000 to R900 000.

Calgro M3 have 2719 units currently under construction, with more than 22 000 opportunities in the pipeline. The estimated revenue from these 22 000 opportunities amounts to R15.9 billion, excluding the Frankenwald project. In August 2022, the City of Johannesburg approved the Frankenwald development, which will allow for the construction of 20 000 to 30 000 units between Kelvin in Sandton and Alexandra township in Johannesburg.

Calgro M3 believes that the demand for affordable and entry- level housing in South Africa remains high. There is a significant population of first-time homebuyers, young families, and low- to mid-income earners in search of affordable housing options.

However, affordability remains a challenge for many potential buyers due to factors such as unemployment, limited access to credit, and a recent increase in interest rates over the past 18 months.

Segment 2: Memorial Parks

The remaining 2% (R35 million) of the total revenue comes from the memorial parks division. The concept of Memorial Parks originated from the need to find alternative uses for large portions of Calgro M3-owned land that were not suitable for residential of other commercial purposes. 

The memorial park business currently operates five parks located in Gauteng (Nasrec, Fourways, and Enokuthula), Free State (Bloemfontein), and Cape Town (Durbanville). Collectively, these parks offer over 99 000 burial opportunities, that will generate approximately R2.1 billion in revenue. 

Calgro M3 Memorial Parks aim to meet the demand for personalized and customized burial options by providing a wide range of memorial and burial choices. These options include personalized headstones, memorial gardens, family estates, and alternative options like memorial walls. The income generated by the memorial parks primarily covers the overhead costs of the business.

Calgro on the move

Over the past three years, Calgro M3 re-evaluated their designs, construction methods, and overall value proposition to clients. This strategic initiative resulted in improved property utilization, reducing dead space such as walkways and staircases from 25 30% to under 20%. Consequently, they are able to build a lot less squares for every sellable square meter. This initiative added an additional 1600 units to the pipeline at no additional cost.

These efficiency gains have translated into a remarkable financial performance, with Calgro M3 achieving a record-breaking profit after tax of R186.2 million, reflecting a significant increase of 40.8%. This growth contributed to a gross profit margin that exceeds 20% for the fourth consecutive year. Furthermore, the company has successfully maintained stable unit prices, ensuring their clients receive excellent value for their investment.

The memorial parks division of Calgro M3 encountered difficulties over the past year, primarily stemming from affordability concerns. With the prevailing high inflation and interest rates, consumers are facing financial pressure, and as a result, investing in memorial parks may not be their top priority. To address this, the company introduced a lay buy system, enabling clients to purchase graves and pay for them over a 24- month period, interest-free.

Valuation

Given the current trading level at 2x their price earnings, Calgro M3 has been actively repurchasing shares, believing it to be in the best long-term interest of shareholders. In recent months, an additional 9.27% of shares was bought back by the company.

Although Calgro M3 is presently not distributing dividends, they have announced their intention to adopt a dividend policy within the next year. These dividends will be funded from generated cash and profits, demonstrating the company's commitment to sustainable growth and value for their investors.

Despite Calgro M3's impressive financial results on 15 May, the group still seems highly undervalued. If Calgro M3 would liquidate all land and current units and pays of all debt, the company could net about R1.1bn. This calculation implies a price of over 800 cents per share, supported by a NAV per share of 951 cents. These figures significantly exceed the company's market capitalization of R419 million and its share price of 310 cents.

So, the lingering question remains: Will the market recognize the true potential of this undervalued and unappreciated gem?