Roy Cokayne
4 minute read
19 May 2020
8:19 am

Calgro closes construction division, retrenches 150 employees

Roy Cokayne

Shares down more than 50% despite group achieving a turnaround to profit.

File image for illustration: iStock

About 150 employees at JSE-listed property and private memorial parks developer Calgro M3 Holdings have been retrenched, following a decision by the group to close its construction division.

These retrenched employees could not be absorbed by Calgro M3’s new outsourced contractors.

Calgro M3 has also decided to sell its entire residential rental portfolio and use the proceeds to settle debt.

In October last year, it valued this portfolio, comprising about 400 occupied rental units and a further 400 rental units it was then tenanting, at about R500 million.

Shares in Calgro M3 slumped by 51.25% to R3.90 a share Monday, despite the group reporting a turnaround to profitability and a significant improvement in its cash generation and reserves in the year to end-February.

Calgro M3’s strategic decision to rightsize the business and focus on cash generation resulted in revenue for the year decreasing by 1.3% to R984.1 million from R997.1 million in the previous year.

The costs associated with these low levels of activity resulted in the gross profit margin being put under pressure and decreasing to 10.2% from 12.9%. However, the operating loss of R29 million in 2019 was turned around to an operating profit of R48 million.

Headline earnings per share increased by 108.7% to 1.77 cents from the restated 20.30 cents headline loss a share in the previous year.

Calgro M3 CEO Wikus Lategan said on Monday cash and cash equivalents at the end of the year increased 108% to R255.1 million from R122.6 million in 2019, which placed the group in a strong liquidity position at the start of the new financial year.

Lategan added that closing the construction division, rightsizing the business and closing offices had probably cost the company between R20 million and R30 million.

He said this has resulted in the group’s fixed overheads or running costs declining from about R25 million in February last year to R19 million in October last year and R14 million currently.

Lategan said this decision was largely driven by fixed cost reduction to enable the group to support itself much better in challenging times and it had “almost set ourselves up for Covid-19 in this respect”.

Hard truth emerged

He said the decision to close the construction division followed analysis of the risk versus cost benefits.

“To our great discomfort we found that although we thought we were generating an additional 3% on the total package, we were, in effect, only making an additional 1.5% on the total package at optimal construction capacity.

“Then you start deducting all the overheads associated with that and you are actually making losses or effective negative margins in some cases.

“There are contractors that build way more efficiently than us and specialise in that,” he said.

“We’re going back to what we are – a residential property developer and memorial parks developer, and not the biggest contractor in town.”

Lategan added that the group is in advanced discussions with third parties to sell residential rental units in the Ruimsig and Scottsdene developments as a bulk transaction.

He added that free-standing houses are being sold in the open market in South Hills, as the attractiveness of such houses within security estates in the lower end of the market is increasing.

Once the disposals are complete, Calgro M3 will no longer have a residential rental property portfolio, he said.

However, Lategan said once liquidity returns to a satisfactory level, the residential rental property portfolio will be re-established.

He said part of the challenges the group has faced in the past few years resulted from trying to build a capital-intensive residential rental business when capital was not freely available.

Profit focus

“The whole intention is to bring down overheads so we can again generate R300 million profit a year and utilise that [profit] and not shareholder’s money at this stage, which has negatively impacted the growth of the rest of the business.

“I still believe from a risk mix, this business needs more annuity income to absorb the different cycles,” he said.

Calgro has five memorial parks in Gauteng, Bloemfontein and Cape Town, with another three in the group’s developments.

It has plans to establish a national footprint for this business but has placed on hold planned acquisitions in the Eastern Cape, Tshwane and KwaZulu-Natal in its 2020 and 2021 financial years.

Lategan said Covid-19 put “a spanner in the works” of short to medium term plans to establish a national footprint for the memorial parks business and this is now a medium to long-term plan.

He believes people are underestimating the long-term effect of Covid-19.

Lategan does not believe there is currently widespread pressure on consumers because of all the government stimulus packages.

“That is going to be short-lived because our government only has so much money.

“So I think we are going to see long-term devastating effects for some families, with businesses having to downsize, which will impact all our clients,” he said.

“We first want to see what the effect of that will be before we start increasing [memorial parks] anywhere.”

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