In a period described by CEO Wikus Lategan as one of the most difficult ever experienced by the company, JSE-listed Calgro M3 posted revenue of R628.6-million for the six months ended August 31.

Calgro M3 faced several major challenges, including uncertainty over the economy, coupled with government’s policy indecision pertaining to land expropriation.

“Our Scottsdene and Fleurhof projects were shut down because of illegal occupation with additional security and repair costs amounting to about R65-million. Associated claims are in the assessment process but not yet finalised and so not accounted for. This will be an income with no associated expense when approved,” Lategan stated on Monday.

He also cited major electrification challenges at Fleurhof, resulting in a standing time cost of roughly R14.5-million, and the drought in the Western Cape as having had a further negative impact on the group’s operational cash flow, which led to the deliberate slowdown in levels of activity on other sites.

However, despite the uncertainties and challenges, management had worked hard to ensure the group retains a healthy balance sheet, Lategan said.

“We have ten projects in the ground at various phases, which is pleasing, and we expanded the Memorial Parks business quite considerably during the year.”

FINANCIAL REVIEW
Lategan cautioned that a revenue comparison between the periods presented should not be performed, as the group has elected not to restate the comparative information as permitted by IFRS 15.

“The impact of IFRS 15 has been applied using the modified retrospective restatement method allowed under the standard, resulting in an adjustment to the opening retained earnings on March 1, 2018.”

Had revenue been accounted for under the previous accounting standards, he said revenue would have been R657-million, a 34.95% decrease from the R1-billion reported in the previous period.

Combined revenue, under the previous accounting standards, decreased by 37.4% to R815.7-million owing to the deliberate slowdown in operations by management.

In response to the negative impact of the adoption of IFRS 15 and IFRS 9 on the net debt to equity ratio, and the impact that this increased ratio has on the group’s future gearing ability, the participants of the Executive Share Scheme unanimously agreed to forfeit the scheme in the 2019 financial year to enhance the equity of the group through the reversal of the share-based payment reserve of R118-million to retained earnings.

The cancellation of the scheme resulted in the remaining expense on the scheme being fast-tracked through profit and loss in the current year, amounting to about R44-million, increasing administrative expenses.

Considering the land invasion charge of R65-million, the electrification standing cost of R14.5-million, and cancellation of the executive share scheme and corresponding fast-tracked expense of R44-million with no associated cashf low, the pre-tax effect of these combined, amount to R123.5-million.

This does not take into consideration the opportunity cost of the capital tied up in Scottsdene and Fleurhof or the additional cost of working capital.

The additional increase in administrative expenses of 55.51% from the previous period is mainly due to increases in marketing and advertising, salaries and wages and professional fees. The finance cost expense escalated largely owing to increased working capital requirements owing to delays on the various projects.

During the period, the group invested very little into new infrastructure to reduce pressure on working capital.

Basic earnings a share decreased by 50.16% to 23.78c.

Similarly, headline earnings per share decreased by 93.48% to 3.11c. The new metrics introduced in the prior financial year provide additional information on the group’s performance. Core earnings a share decreased by 82.62% to 13.40c.

OPERATIONAL OVERVIEW
In terms of residential property development, Calgro M3 has ten projects in the ground that contributed to revenue, which made the impact of delays more manageable, the company said.

A total of 5 279 units were under construction during the period, of which 1 843 units, of which 934 were fully subsidised, were handed over. With more than 9 500 serviced or near serviced opportunities, the group remains well positioned to increase sales to the private sector and to assist government in the eradication of the housing backlog when governmental budget is available.

The Memorial Parks business’ sales continued to grow monthly, with 649 grave and niche sales being achieved for the six months under review, compared with 947 for the whole of the previous financial year.

Lategan said that the national roll-out plan is advancing rapidly through the acquisition of the Durbanville Memorial Park in Cape Town on March 1, and the Avalon Memorial Park in Bloemfontein on June 1.

Tshwane and KwaZulu-Natal are targeted for expansion, planned for early in the 2020 financial year.

Meanwhile, 696 housing units were handed over to the Afhco Calgro M3 Consortium, a real estate investment trust (Reit) joint venture (JV), during the past six months.

“Calgro M3 remains confident in the rental market and believes the affordable rental market has immense potential,” said Lategan, going on to add that this rental market strategy further assists government in eradicating the housing backlog without exposing the Group to diminishing public sector spending.

The first 40 of 480 units that were acquired from an external developer will be handed over to the Reit JV in November.

“In view of the slow rental uptake, the handover pace of these units was re-negotiated and extended by a further six months to ensure an effective tenanting process.”

“We’ve strategically aligned the group to ensure we remain committed and set to the targeted return on equity of 30% over the medium term, based on a residential property development pipeline of R25.3-billion, Memorial Parks pipeline increasing to R2.2-billion and real estate investment with a targeted return on equity of 20.5%, amounting to the annual rental yield plus revaluation growth, on an estimated group equity investment of R4-billion,” Lategan pointed out.

He added that this would enable the extraction of multiple sources of revenue and profits from business and opportunities along the turnkey property development value chain, which will lead to an improved operating margin blend and the creation of annuity income.

“We remain focused on our strategy of ensuring that the three segments contribute evenly to profitability in the future,” he said.