‘The Good, The Bad and The Ugly’ – Calgro M3 releases financial results

JSE-listed Calgro M3 has released its financial results
for the six months ended on the 31st of August 2020.

Looking back at the past six months, one can’t help but
think of the movie, with Covid-19 already having been compared to ‘The Ugly’ by
many South African companies. However, in our case, the past three years have
been ‘The Ugly’, with Covid-19 being ‘The Bad’, hampering the progress of ‘The
Good’
” commented CEO Wikus Lategan who candidly compared the first half of
the year to 1966 film, ‘The Good, The Bad and The Ugly’.

Lategan says that following twelve to eighteen months of rigorous restructuring initiatives, the internal construction division had been successfully closed. “We believe that the leaner business, together with little pressure to invest in capital intensive projects over the short term and enhanced levels of liquidity, has positioned us extremely well to deliver much stronger results once trading conditions have normalised post Covid-19.’

The company continued to generate positive cash from operations despite the difficult trading conditions which resulted in the net debt to equity ration of 1.04 to 1, consistent with the 29th of February 2020. Cash resources remained strong with R246.0 million in cash on the balance sheet on the 31st of August 2020. Liquidity was further enhanced in September 2020 by securing and drawing on a new six-year, R215.0 million unsecured NHFC facility.

In addition, the group remains in negotiation with the United States International Development Finance Corporation (‘DFC’ – previously OPIC) for a six-year, unsecured facility of US$20 million. The drawdown on this facility is expected in the second half of the 2021 financial year. Calgro M3 retains the undrawn R100.0 million Standard Bank overdraft facility in addition to the above cash resources and facilities. Additional liquidity is expected from the sale of its retail, commercial and rental properties and as certain non-core development projects are sold.

Lategan said the sale of the Ruimsig rental units became unconditional on the 17th of September 2020, resulting in R104 million in debt being settled as part of the transaction in addition to the settlement of a further R129 million in Bond Exchange debt that matured in September and October 2020 reducing the total outstanding Bond Exchange debt to R411 million.

Of the remaining R411 million, R81 million, which was to have matured in the next 12 months, has already been refinanced into new three-year and four-year instruments. Furthermore, the remaining Bond Exchange maturities up to January 2023 of R185 million, will be reduced to R85 million once all restructuring is complete” he commented.

Financial review

Revenue for the six months ended 31 August 2020 decreased by 24% to R395.8 million (2019: R520.8 million). The gross profit margin for the period was flat, continuing to be placed under pressure when compared to historical levels of 20% to 25%. This is because of the low levels of activity, standing-time related costs as well as the costs of closing the construction division, with the margin settling at 7.9% (2019: 7.6%).

No construction in the residential property development segment took place for a period of two months due to the pandemic. This was unprecedented and resulted in once-off costs incurred to ensure future sustainability and liquidity. Covid-19 costs and the associated standing-time amounted to R35.8 million and the costs associated with the closure of the construction division amounted to R12.9 million. The latter is a strategic decision which in future will result in a slight additional contribution to margin.

Operational Overview

The Memorial Parks business, seen
as risk diversifier against the traditional lumpy and cash intensive residential
property development business, demonstrated its potential in the first half by
increasing cash revenue by 65.7% to R25.8 million and accounting revenue by 75%
to R19.3 million (August 2019: R11.0 million).

According to Lategan, confirmed Covid-19 burials represented R2.6 million of the total cash received in the period. “From an internal assessment, the increase in sales is a combination of increased market share, as well as increased mortality over the period as a result of Covid-19. The fundamental function of being a stable and risk mitigating business is clearly being demonstrated through these uncertain times.”

He said that the Nasrec, Fourways, and Durbanville parks performed extremely well, while Enokuthula is still in its infancy, only becoming fully operational in March 2020. “There is a continued emphasis on sales distribution channels, relationships with funeral directors, targeted sales and new products to enhance affordability. The national rollout and development of further land parcels within existing parks is a priority. The acquisition of new parks is only planned for the next financial year when the business has a better medium to long-term outlook.”

The residential property development
business remains the largest contributor to Calgro M3’s operations,
notwithstanding that this business has experienced extremely challenging
operating conditions for the past few years. Given two months of construction stoppages
due to Covid-19, this segment suffered reduced revenue and incurred standing
time costs.

We expect these delays to have an impact on the next six to nine months as handovers and transfers of units are delayed,” explained Lategan, adding that despite this, the group is well positioned with sufficient working capital and pipeline opportunities to capitalise on the strong housing market, without the need to take excessive risks in securing additional projects or increasing operations too aggressively.

We will increase the development and construction of new units over
the coming months, once clarity on the impact of Covid-19 becomes clearer, to
enable this segment to return to profitability
,” said Lategan, adding that
scrupulous capital allocation is in place to ensure that working capital is not
unnecessarily tied to projects and also to guard against liquidity pressure.

The Fleurhof and South Hills substations, which have been a binding
constraint on the group, are well underway with completion expected in the
second half of 2021. “With clientele becoming more discerning, the focus
remains on enhancing the product offering, while keeping sales prices
affordable and at a level where banks approve 100% bonds. The current low
interest rate environment will further enhance housing sales. The group will remain
cautions of the pandemic’s economic impact on the customer base and the
potential tighter credit criteria from banks
.”

Lategan said that the strategy of focusing on four or less provinces remains in place and that Calgro M3 is negotiating the exit and/or entry into joint venture relationships on projects in KwaZulu-Natal, Free State and the Eastern Cape, where land or development rights are owned.

Outlook

Turning to the future, Lategan said that management is confident that
Calgro M3 is on the verge of leaving “The Bad” and “The Ugly” behind and
returning to “The Good” once the broader impact of Covid-19 on the economy and
the consumer becomes clearer.

The return to profitability and growth will be driven by both
segments where liquidity has been restored, projects are ready to start
producing revenue and are being supported by a leaner, more cost-effective
structure. The housing market in South Africa remains at a shortfall of a couple
of million houses and funeral and funeral-related services are a multi-billion
Rand industry which continues to grow. Both of our businesses and their
respective passionate and dedicated management teams are well geared to
capitalise on the opportunities in the market
.” Lategan continued that these
teams used the time during the Covid-19  lockdown to relook their businesses and assess
where work can be executed smarter, driving the core values of the business and
delivering a product that both Calgro M3 and their clients can be proud of.

Lategan concluded that capital allocation will remain a key focus, with
the group retaining higher cash balances and available facilities for the
foreseeable future.

This more conservative approach may result in a negative interest
carry ratio and a lazier balance sheet but will also provide for a much more
sustainable Group that can weather the storms of unforeseeable events.”

Source: Propertywheel.co.za | https://propertywheel.co.za/2020/10/the-good-the-bad-and-the-ugly-calgro-m3-releases-financial-results/

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