Ambitious Calgro shares up 4x in 3 years – on hot air or solid prospects?

After three and some decades analysing investments, it worries me to see executives paying too much attention to the share price. That can very easily incentivise them to focus on something they cannot control rather than something they should. So alarm bells started ringing when I saw a "Share Price Rights Scheme" in this morning's interims from Calgro. Add in the hugely optimistic blaring of a R17bn pipeline of business (the group has yet to exceed R800m in annual turnover) and I'm seriously wondering how much steak is behind the sizzle which encouraged punters to push the company's share price up fourfold in the past three years. Check out this interview and see whether you agree. – AH 

ALEC HOGG: Calgro M3 released its results on SENS this morning. The Company's Chief Executive, Ben Pierre Malherbe is with us the studio. Thanks for coming through so early on the day of your results presentation. These are interim results. You have a company that turns over around R800m annualised, now. You talk about a pipeline of R17bn. Just explain what this pipeline is.

BEN PIERRE MALHERBE: Let me quickly touch on the revenue/turnover. We're doing some JV's with financial-backed partners and if you do include them, our turnover is quite a bit higher, so about 50 percent is not included in the turnover.

ALEC HOGG: But it's a long way from R17bn.

BEN PIERRE MALHERBE: If you look at the R17bn pipeline: we either bought or secured the land ourselves, or secured it by way of a Land Availability Agreement with either private, individual landowners, or with government. For example, a project in Cape Town where we signed a Land Availability Agreement with the City of Cape Town to develop land on their behalf. This pipeline would therefore include anything that would come through revenue over the next six years.

ALEC HOGG: Six years?

BEN PIERRE MALHERBE: Yes.

ALEC HOGG: So you're going to go from R800m at the moment (published), to R3bn (if I work it out) on average, over the next six years. It seems very optimistic.

BEN PIERRE MALHERBE: It is, but if you look at the market segment and you look at the opportunities within the market, it is.

ALEC HOGG: How are you going to fund it?

BEN PIERRE MALHERBE: We don't need funding to secure the land. Bear in mind that all the land has been secured already, so we don't need funding to secure this land.

ALEC HOGG: Secured… In what way? Options, or do you actually own it?

BEN PIERRE MALHERBE: We own it. We've bought most of these lands over a period of time, since 2007 coming through the listing period, so most of these properties have been secured in the sense that we actually own them. There are some properties have been secured on a Land Availability Agreement, which actually, belongs to Government. It's Government-owned. We just develop on their behalf.

ALEC HOGG: So you're going to quadruple your turnover – on average – in the next six years, on land that you already own. It looks very ambitious, but I see your share price has been moving over the past couple of years – fourfold in the last three years. Is that in anticipation of this mushrooming?

BEN PIERRE MALHERBE: The problems with the developments we're doing: buying land or acquiring the land up to when we can actually develop it, is a three/four-year period. It take a long period that it takes to go through the environmental issues and actually get to the stage where you can get the ground and implement, so it has been coming a long time now.

ALEC HOGG: Is there a pent-up demand for these projects? We look at an economy that's growing at under two percent and the kind of growth rates that you're projecting are a long way, away from that.

BEN PIERRE MALHERBE: If you look at some statements made by the Minister of Human Settlements during the last couple of weeks, she said she wants to bring one-point-five million units to the market.

ALEC HOGG: But Jacob Zuma wants to bring five million new people into the employment market. He can think what he wants, but he has to actually deliver. What are the chances of this Human Settlements Minister actually, not just using hot air?

BEN PIERRE MALHERBE: I think it's a combination. We're very fortunate that we've played public and private sector. Half of our exposure is towards Government where there's a big demand, a lack of service delivery, and housing forms part of the service delivery component, and so we have a lot of support from the public sector side. At the same time, if you look at the private sector with all the financial institutions signing the Financial Services Charter, committing R80bn to come into this market over the next five years, I think the opportunities are both.

ALEC HOGG: Eighty billion. Do you expect to get about a quarter of that?

BEN PIERRE MALHERBE: No.

ALEC HOGG: So where is your R17bn coming from?

BEN PIERRE MALHERBE: Just remember, that R17bn includes infrastructure. A lot of that revenue will come through as infrastructure. That's the creation of bulk. We have to go and build reservoirs. We have to go and build substations to provide electricity. It doesn't all come through the numbers. You won't just count the numbers and say 'I need to build so many houses to get to the revenue'. A lot of infrastructure is behind that.

ALEC HOGG: Something that was interesting in your numbers – and it's good to see that you disclose these things – you have a share appreciation rights scheme, which is fine except that your barrier/hurdle rate is a CPI. For a company that's going to go as high as you're going, why do you have such a low hurdle rate before this kicks in?

BEN PIERRE MALHERBE: Okay, I think there are two sides to it. We're currently looking at senior management. We say we are a leader in integrated developments. Currently, a lot of competition is coming into this market. Many of the traditionally civil engineering companies are coming into the market, competing in our market space, and we need to make sure that we retain the expertise we've built up. There aren't many places we can go to acquire these skills. We're bringing them through the system and we have to create these skills for ourselves. There's a lot of competition and these projects are becoming bigger and bigger. If you look at a project like Lufhereng that's been recently awarded by the City of Johannesburg, we're talking about R8bn projects so there's a lot of competition looking at internal staff as well, so we need to – at all costs – retain our expertise in-house.

ALEC HOGG: So you have a share appreciation scheme, which is basically, guaranteed share options. If you can't grow by more than CPI (your share price, nogal) and we're not talking about bottom-line, which is a very strange picture…

BEN PIERRE MALHERBE: CPIX plus two percent is the barrier.

ALEC HOGG: Okay, it didn't say that in your SENS report. Anyway, I'll go and reassess that. Good luck to you, Ben Pierre Malherbe. You clearly need it with these ambitious programs that you have.

THE SHARE APPRECIATION NOTE IN TODAY'S SENS REPORT:

SHARE APPRECIATION RIGHTS SCHEME

     In terms of the Share Appreciation Rights Scheme introduced on 1 March 2012,
     9,178,172 share appreciation rights (SAR's)(with a vesting period of 2, 3, 4 and
     5 years if a hurdle growth rate linked to the Consumer Price Index (CPI) is
     exceeded) were issued to directors and senior management. This has resulted in an
     amount of R5,377,927 being recognised as an expense in the Statement of
     Comprehensive Income for the period ended 31 August 2014. In terms of the Scheme,
     1,666,666 of the SAR's were exercised on 1 March 2014 and replaced with 1,744,838
     new SAR?s on the same date.