As arguably one of the most challenging years draws to an end, few South African companies are feeling festive, with most entities disappointing on profits as a result of anaemic growth conditions, a highly indebted customer base and disruptive strike action.

While this has led to a renewed call for diversifying offshore, Calgro M3 continues to fill its pipeline with local projects. The company has been one of the big winners over the past five years with the share price up 84% per year or, stated differently, returning 21 times capital. With the market capitalisation recently moving above R1bn, Calgro M3 should attract more institutional attention.

This low-cost housing developer differentiates itself by offering a turnkey approach: being the land owner, developer and contractor, owning the town-planning practice and doing the marketing of the developments in-house. This flexible business model allows the group to control the pace of developments and, more importantly, cut its flexible cost base quickly in order to withstand challenging market conditions. Furthermore, it de-risks the business model substantially as the company is less dependent on external parties, making Calgro M3 an attractive counter in a distinctly unloved industry. Management holds significant equity in the business and has proven to be astute project managers.

In its interim results, Calgro M3 reported an increase in headline earnings per share (HEPS) of 27% with gross profit margins increasing to 20% as a result of predominantly top-structure construction. The company rests on a healthy cash balance of R167m that is sufficient to fund month-to-month operations. The flagship Fleurhof project is also contributing positively to cash flows, allowing the group to fund new projects as it continues on its growth path. The next six months are expected to be driven largely by infrastructure installations as the company starts on the Belhar, South Hills, Jabulani Hostels and Vista Park projects, where higher revenues and lower margins should be expected during this phase of the development cycle.

With South Africa’s housing backlog of 2.1m houses, there are ample opportunities for Calgro to grow its current pipeline of R17bn. The group also recently announced a lucrative joint venture opportunity with Esor on a R2.1bn project in Diepsloot. As more projects are taken on, construction capacity by the group becomes limited from a funding and capacity perspective.

The key risk is ultimately uncontrolled growth and possible reputational damage from substandard work. While Calgro M3 does not aspire to be the biggest construction company but rather the developer of choice, the need to ensure quality housing units at the correct price points is imperative.

On a compound annual growth rate (CAGR) basis, Calgro has grown HEPS at 38% per annum over the past five years (from 16c/share to 83c/share) and by 42% per annum on a trailing 12-month HEPS basis. Carrying land at a cost of R550m with a market value in excess of R1.3b, this is greater than the current market cap. This land value translates into R10.22 a share compared to the current share price of R9.71. With a return on equity of 27% over the past three years, trading at a price-to-earnings ratio of 10 times and the land value underpin, we think Calgro M3 should provide some welcome Christmas cheers to investors.

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