Calgro M3 (CGR) released its FY 13 results with revenue rising by 55% to R798m (FY 12: 515m). The Group's GP margin widened to 18.53% (FY 12: 15.44%) lifting HEPS up by 40% to 71.84cps (FY 12: 51.44cps). ROE rose to 32.41% (FY 12: 31.81%) as the cash generation remained healthy for a fast growing business and its balance sheet’s gearing remained arguably low.
Calgro's low income project pipeline is c.40,000 units with an estimated project revenue of c.R10bn over an approximate time horizon 6 years (actually closer to R11.6bn over 6 years, weighted towards the nearest 3 to 4 years). The Group’s Mid-to-High (c.R0.8m to R1.8m market price per unit) project pipeline is worth a further R1bn in revenues.
Now South Africa’s demand for housing is quite simply huge. As a major player in the market, Calgro M3 estimates it only addresses c.3% of the market needs.
Thus, the Group finds that the major risk facing it as a business is “uncontrolled growth”. Management constantly undertake a careful process of building capacity, managing cash flows and handling liquidity to ensure the growth trajectory is sustainable.
In FY 13, management estimate that Calgro's revenue could have been as high as 50% more had they cast the risk of uncontrolled growth to the wind and simply chased growth! But, beyond even the question of funding this scenario's level of growth, the reality is that the quality of delivery would likely have dropped and thus begun to risk the business’s sustainability via reputational risk.
Despite this endless demand for local housing, the reality is that the Group does operate in a fairly cyclical industry. Thus the Group only employs 93 permanent staff and management assert that they can "flip the switch" at any time on its cost base. Specifically, management say that they can wind down 50% of the Group’s cost-base within 60 days of deciding to do so (i.e. a huge portion of costs are variable in nature) and can expand or contract depending on the project pipeline.
Playing around with a rough DCF, I still get a fair value of around R10 per CGR share... See my previous article on Calgro M3 here: Calgro M3 - Rough Valuation.
Overall, Calgro M3 continues to be one of the most exciting small caps I see in our market.
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