Key message: A shift back to a simple development model and debt maturity restructuring has left Calgro well positioned to cash in on the development pipeline. The discount to realisable NAV is substantial.
- Calgro M3 is a developer of integrated residential developments, and developer and manager of memorial parks. Calgro operates in the lower-to-middle segment of the residential property market. The average price of a Calgro home is approx. R450k.
- Calgro is effectively a private sector developer – public sector housing is a small and declining part of the business, although developments cater for government subsidised purchases and rentals.
- Calgro has shifted back to a simple development model that worked well previously. Development projects have been reduced from 15 to 7 over the past year, with a geographic focus will be on the faster growing Gauteng and Western Cape regions. Memorial Parks are starting to contribute meaningfully and provide some relatively stable diversifying revenue compared to the development business.
- Debt maturities have been restructured to a longer-term profile. All debt is accounted for as a current liability due to the accounting treatment of the operating cycle (working capital, construction contracts and work in progress up to 10 years). Debt due in the next 12 months (to Feb 2022) is only R97m of the total debt of R958m.
- Calgro is well within debt covenants with little risk of breach.
- Calgro is traditionally very conservative on accounting for book value – everything is on the balance sheet at cost and this does undervalue the property portfolio by approx. 33%.
- Land invasions remain a risk, but risk mitigation measures have been effective in recent land invasion attempts.
- To value Calgro we place the property portfolio on a 30% discount to the market-adjusted NAV (this equates to a 11% discount to the accounting book value of R1.2bn).
- Our Target Price for Calgro is R6.20. Calgro is trading at a significant discount to realisable NAV.