There was a moment there when Calgro M3 was on a roll; shares in the residential building company climbed from R2.70 in March 2023 to peak at over R7 in October 2024. But the stock is back at R3.75 after a similarly relentless slide — and now trades way below its stated NAV of R17.21. First-half revenue came in at R465m, with headline earnings per share down about 5%. But the group continues to grind out a major project with the City of Joburg (CoJ), and says it’s on the cusp of some meaty cash inflows. The FM spoke to CEO Ben Pierre Malherbe.
How much damage have this year’s fuel price hikes and interest rate rises done to the financials?
Sentiment was damaged more than anything else, and what that forced us to do was lean towards investor-buyers. People are looking to buy, but they’re under pressure and it’s difficult to convert sales into bankable transactions.
Who are ‘investor-buyers’?
These are private Reits [real estate investment trusts] that specialise in rental stock. In the past couple of months we’ve signed 140 units at Scottsdene for a one-off sale, and the 464 units we wanted to take to market at Belhar, someone said they’ll take the whole lot. They expect a bit of a discount, but we don’t pay marketing commission or holding costs, so it’s not as if we walk away from a lot of the upside.
Can you remind us why you’re selling off property assets within the mid- to high segment and retirement estates?
Before we ventured into integrated developments, we were doing these cluster developments of 50 units aimed at the market of R2m upwards. We said: ‘We’re spread too thin; we can’t do 10–12 projects at a time, let’s pick projects of scale and focus on that.’ As we sit here, the noncore assets have a value of about R600m, so the intention is to unlock half of that over the next 24 to 30 months. And at the same time, we have these half-built projects like Scottsdene that we will trade out, which will allow us to focus on the core business.
Your rolling return on incremental invested capital was only 3.67%, from 17.67% a year ago. Why has it dropped so much?
First, Bankenveld City District. We’re in the investment phase; we’re putting a lot of money into the installation of services, like roads, that are going to be handed over to the city, and we haven’t been able to recover any of that as yet. But because we’re the landowners, we’re investing in our own land to make it developable. It’s an unnecessary cycle; all over the world you’ll find that the public sector makes land available with rights and bulk and link infrastructure, while here we’ve got to create that infrastructure. That will unlock the first 5,900 opportunities. The second thing is the units we’re building at Scottsdene. We haven’t transferred and received anything, but when we do in December, [the cash] will be recognised.
And your debt? It’s at R1.4bn — where do you want it to be?
We’re happy with it at a 0.75 debt-to-equity ratio, but 18 months ago we were sitting with half-built properties at Scottsdene, so we put money in to trade out. I want to balance the exposure to these smaller projects that we’re trading out of while investing in the big core projects. But they’re draining the cash right now. The debt is unnaturally high — we’re at a ratio of 0.86 — but as soon as we transfer units out and take the money and bank it, the ratios will start recovering.
Is the upcoming local government election key to Calgro?
Yes and no. It’s creating some instability and it’s difficult to work with the City of Joburg, but what helps us is that we’ve got sufficient serviced opportunities — 1,700 stands that we can build a house on now — so that’s enough to keep us going for a year.
Memorial parks are doing well — revenues grew 20% to R47.8m. Do you have any major constraints there?
You must keep in mind the reason we’re doing the memorial parks on the side is the cash. When you grow into a big project like Bankenveld and you invest R300m into bulk infrastructure, it’s great to know the overheads are being paid, and that’s the cash generation of the memorial parks. It’s got a different risk profile, it doesn’t care about interest rates or election cycles. I was asked whether we can grow it a lot bigger, but before we go there, keep in mind that because we deliberately slowed our exposure to the public sector, our construction effort is not as big as it should be. As soon as Bankenveld starts delivering and unlocking cash, the memorial parks business will become smaller [within the group]. I think the 10% contribution is high. Can we double the business? Yes, but it doesn’t mean it will become 20% of the business.
You’re trading so far off your NAV of R17.21 it’s scary. Why is sentiment so bad?
You have to keep in mind that we went to the market and said we were doing Bankenveld, a project with 20,000 units, and the first question was: ‘Are you going to do this with the CoJ?’ People are nervous about our association with Joburg, so I think there’s a lot of caution in the market. But our dependency is not as heavy as the market perceives. Every time the minister of finance writes a letter to the City of Joburg saying he’s going to withhold money, everyone holds their breath. But we are still the landowner, so we can decide if we want to play in the subsidised or partially subsidised market; we’ve got that flexibility. If we can successfully dispose of noncore assets and trade out these half-built projects, the cash that’s being unlocked will put us in a much better position.
