JSE-listed Calgro M3 will, in the months ahead, continue to focus on effective liquidity management, by giving careful consideration to the best use of the group’s cash on each project and considering any downside risks, given the current unstable and uncertain South African economic and political climate, which is expected to remain protracted.
The company on Monday reported that its focus on cash flow generation and cash preservation during the six months ended August 31, had paid off, with cash generated from operations having increased to R449.5-million.
The company managed to stabilise its cash flow through various debtor and progress draw recoveries, despite difficult economic times, which enabled the company to support itself without having to sell off any of its assets outside of the ordinary course of business.
CEO Wikus Lategan noted that a decision had also been taken to suspend work on various developments, which resulted in additional costs being incurred.
“As anticipated, reducing operations to an extremely low level impacted on gross profit, but we believe these decisions will ensure the overall sustainability of the group and mitigate any risks associated with unplanned delays and stoppages on major projects,” he said.
The group also encountered other successes during the period, such as the construction of the Fleurhof substation getting under way, with an anticipated completion date of August 2020.
The illegal invasion of Scottsdene was also being resolved, with no other Calgro M3 units currently being illegally occupied, the company confirmed.
Commenting on the company’s financial performance for the period, Lategan said the deliberate slowdown in operations across all development sites resulted in revenue for the six months decreasing by 17.2% to R520.8-million, while combined revenue decreased by 26.4% year-on-year to R579.5-million.
Costs associated with low levels of activity resulted in the gross profit margin coming under pressure, decreasing to 7.6%. Without these costs, the gross profit margin would have been 16.3%.
“The lower margin is also attributable in part to International Financial Reporting Standards 15, which must be kept in mind when looking at our historical 20% to 25% margins,” Lategan pointed out.
Insurance claims amounting to R16.4-million were recovered from South African Special Risk Insurance Association (Sasria), with claims totalling R34.5-million still under assessment.
Basic earnings a share decreased by 106.1% to a loss of 1.46c. Similarly, headline earnings a share decreased by 204.2% to a loss of 3.24c.
The positive cash generated from operations of R449.5-million was as a result of the receipt of outstanding invoices and progress draw recoveries, primarily from the public sector. The net cash generated resulted in the construction contracts and trade and other receivables balances decreasing by 35.2% on a combined basis.
The group’s residential property development business is well positioned to restart construction and increase capacity on a number of projects, with 7 837 fully serviced opportunities available for development, as well as 3 317 units already under construction and at various stages of completion.
“We are aiming to complete around 2 000 units for the 2020 financial year and [restart] construction on another 2 253 units in the second half of the 2020 financial year, cash flow permitting,” Lategan noted, adding that, based on the estimated timing for completion, Calgro M3 will have sufficient working capital available to start the additional units without raising additional working capital in the short term.
He added that the business would remain focused on rolling out its current pipeline in the most efficient and effective manner possible.
Further, the company’s Frankenwald development is the last remaining large-scale property in the greater Sandton area and is situated next to Alexandra and the Marlboro Gautrain station.
The development will yield between 40 000 and 50 000 residential opportunities after densification of the current rights. No material financial commitments on this project are planned for the next four years, Lategan said.
“With enough serviced opportunities available, Calgro M3 decided to only develop new integrated development infrastructure should government funding become available. In the interim, we will remain focused on cash preservation and the delivery of completed units,” said Lategan.
Budget for civil infrastructure has been approved on the South Hills, Jabulani and Vista Park developments. The electrification budget for the Fleurhof substation has been approved and the electrification budgets across all other projects are being monitored closely.
Lategan added that Calgro M3 remained bullish about growth opportunities in its memorial parks business and its ability to match the profitability of the property development business in the medium to long term. The current areas of focus, in order to achieve this goal, are establishing a national footprint and enhancing sales distribution through various channels.
Sales for the period were under pressure as a result of declining customer affordability levels and lower-than-expected sales throughout the winter months.
Total revenue for the period decreased by 7.3% to R11-million, with total grave sales declining by 15.4% to 473 graves. Extended payment options are also offered to clients, with up to 12 months to pay. Total sales sold on deferred payment terms, for which no revenue is recognised, amounts to 62 graves, totalling R2-million in sales.
Owing to the decline in sales, the group instituted various corrective measures to ensure the business returns to high levels of growth. Additional sales agents and sales managers were appointed, while the new group marketing and sales head was seconded to work exclusively on the Memorial Parks business until a turnaround is achieved.
Other interventions include focused marketing campaigns and special pricing options.
Management has an estimated valuation of R520.3-million on this business based on the exit value of the Nasrec Joint Venture partner interest during the previous financial year.
In terms of its residential rental investments, Lategan explained that Calgro M3 had entered the rental sector to secure annuity income to boost operating cash flow across the group.
“The medium- to long-term strategy of this business also includes an equal profit contribution to that of the property development and memorial parks businesses,” he said, adding that “the group will, however, not invest into this business in the short term due to the capital intensive nature of the business”.