Residential property developer Calgro M3 Holdings sits at an interesting juncture with its key development in the Bankenveld district in Gauteng. It’s at an early stage of the project life cycle and consuming a fair amount of cash and capital. At the same time, there are potential land release opportunities in the Western Cape that could quick-march business levels at Calgro.
CEO Ben Pierre Malherbe, however, is confident that shareholders will see the fruits of this upfront investment when the Bankenveld project moves into a sales phase and cash starts to flow back into Calgro coffers.
Calgro gets very little love from the market, with the share trading on a dismissive earnings multiple of just 2.7.
The rating ignores the fact that Calgro has spent the past 12 months trying to tidy up its legacy property and noncore projects. Many of these projects are simply reaching the natural end of their life cycle, and Calgro wants to recycle the capital out of them as quickly as possible and into new projects that will be core to future results — including the Bankenveld mega-project.
Though good progress was made this year, it will take another 12 to 24 months before all these projects are fully executed. Malherbe stressed that while management is focusing on getting these wrapped up, it is still keeping a keen eye on pricing to ensure the requisite margins and rates of return are maintained.
Like all property developers, Calgro is actively seeking new land banks in strategic locations with the potential to become the next phase of the business’s growth.
Speaking on the Unlock the Stock webinar, Malherbe said Calgro is in discussions with various levels of government in the Western Cape about an integrated approach to the provision of public and social housing.
This model is already employed by Calgro in Gauteng but has not yet been rolled out in the Western Cape. Media reports suggest the City of Cape Town and the Western Cape government are in discussions with some national departments about unused or surplus land associated with various military bases in the Western Cape.
Calgro says it has been in early discussions about possible opportunities related to these land release programmes. These discussions continue. The release of this land in densely urbanised areas in Cape Town would provide excellent opportunities for Calgro and for the government to deliver affordable and social housing at scale.
Like all property developers, Calgro is actively seeking new land banks in strategic locations
However, nothing moves quickly in government, especially when various levels and departments are involved. This will require plenty of co-ordination as there are differing agendas and stakeholders that need to be kept happy. It’s a story to keep an eye on.
In the same week that Calgro released its results came the Sens announcement from listed property developer Balwin Properties, saying it is being taken private through a partnership between the management and founders and the Public Investment Corporation (PIC), who will work together in advancing current and future projects under the Balwin brand.
This is an interesting consortium, given that the PIC is the largest asset manager in the country, and it clearly sees opportunities within its overall property portfolio to participate in the property development value chain. Given that Balwin operates in a higher LSM segment of the market than Calgro, you would expect a more natural alignment of interests between the PIC and Calgro.
However, it would not be desirable for yet another counter to disappear from the JSE boards. One option could be for the PIC to partner with the likes of Calgro at the asset or project level to help deliver housing in the lower LSM market, primarily through Calgro’s product offering. There has been an appetite in the past from the PIC for this type of asset- or project-level partnership, with it owning 50% of the V&A Waterfront with Growthpoint Properties and the Government Employees Pension Fund partnering with Attacq on its Waterfall City development.
One reason for Balwin’s delisting is that it has traded at a deep discount to NAV for a prolonged period, though many might argue that NAV is not the best metric for valuing a property developer vs a pure rental property play such as a real estate investment trust.
However, while trading at a discount to the company’s own stated NAV, it makes sense for the board and management to carefully review all capital allocation decisions to optimise capital efficiency and returns on invested capital.
Given that Calgro is trading at a deep discount to its stated NAV, it is curious that it again paid a small dividend, albeit with no increase from the prior year. Share buybacks, innovative project financing and partnerships with outside players to optimise equity returns on projects or simply fast-tracking Bankenveld through additional cash deployment appear to be more favourable options for capital allocation.
Though every shareholder loves a little dividend deposit into their account, capital allocation is definitely one for the board and management of Calgro to keep under review.
SIDE HUSTLE
Looking past Calgro’s main property development business, there is the promising side hustle in the memorial parks business. While many in the market might have been sceptical of the business in the early days, it’s now possible to think of it as playing to Calgro’s core competence in developing a greenfield site into a property asset where it sells off lots, or in this case, burial plots to the public.
The memorial parks business continues to grow in scale, though it will be quite some time before it reaches anywhere near the size of Calgro’s core property development business. However, the memorial parks business produces a steady stream of cash flows, which initially had a goal to cover head office costs. This goal has now been extended to cover head office costs and the annual interest expense on the company debt. Calgro still believes it has opportunities to expand this business, and it’s ticking along quite nicely in the background and achieving its goals.
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