Calgro M3 (CGR) has recently released some strong results. I have written about the Group before (Market Efficiency, UBU and CGR and, even older, MFL, MMG and CGR), so I won't go into either the business model or the results (see the company website here).
What I want to show you here is the sensitivity analysis of my rough DCF model based on various (fairly conservative) assumptions. Some of the major assumptions include:
- The business model is replicatable beyond the current pipeline of between R8bn to R12bn. As demand for housing is so vast and basically untapped in South Africa, we feel this is a robust assumption.
- 10% Net Profit margin based off H1:13. In reality, this margin may even increase as returns to scale continue to be felt within the Group.
- Net Profit is assumed to approximate long-term cash flows and take into account debt needs, thus WACC = CoE.
- Straight-lining of revenue of the pipeline, which is unrealistic, but used for simplicity's sake.
Given these assumptions, and the R8bn future pipeline disclosed by the Group, my DCF pops out the following fair values:
|Terminal Growth Rate (%)|
|Cost of Equity (%)||0%||1%||2%||3%||4%||5%||6%|
Now even the most restrictive of circumstances (20% CoE and no terminal growth at all) reaches a fair value of around 10% higher than the current share price. So, currently, the market is either pricing CGR at a negative terminal growth rate, some ridiculously high Cost of Equity or, more probably, it is mispricing it. I.e. undervaluing the stock.
I think that the Cost of Equity of c.15% and a terminal growth rate of 3% to 4% (i.e. 3.5%) is much more realistic, if not a bit conservative.
Why do I think that is conservative? Well, Calgro M3 actually has an identified future pipeline much closer to that of c.R12bn...
Using this pipeline, I get the follow (much shortened) DCF sensitivity result:
|CoE (%)||Terminal Growth Rate (%)|
Once again, even in the most conservative scenario (CoE of 15% with nil terminal growth rate), Calgro M3's is severely undervalued at its current share price of only c.500cps. A more realistic fair value based on this R12m future pipeline of work is actually closer to R10 per share.
There are lots of arguments to Calgro M3's prospects and the assumptions made in my DCF. I acknowledge all of those and some are quite valid. But, still, there are counter arguments that point to my model and my various assumptions being quite conservative too.
While no business and no valuation is ever infallible, I do continue to believe that Calgro M3 remains quite undervalued and I have just bought some more myself (Keith's Portfolio).