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What's cooking at Calgro?

Johannesburg - Directors in property developer Calgro M3 Holdings have been snapping up the firm's shares - R3m worth in total since October - but there's no plan to delist the firm, although the possibility has been mooted.

Rather, directors' interest in their own shares is based on the fundamental opinion that the company is undervalued, said financial director Wikus Lategan.

"We're a revenue-driven company, not an asset-driven one, and I was buying shares at R1.70 a share," he said in an interview.

"At current levels and trading at around 1.5 times earnings, I think it's the bargain of the century."

Calgro's share has fallen to 50c from 330c per share since listing, after it missed its forecast targets. The company expected after-tax profits of R37m in full year 2008 and R65m when the company reports its 2009 full-year results in February.

But full-year 2008 profits came in at R31m and in the following six months, only R11.5m was posted in after tax earnings. At the time, the company described prospects as "excellent", citing government's commitment to supply houses to all South Africans.

It reported a net asset value of 114c per share, which is more than double the current share price. Its cash position worsened from R2m overdrawn to R17m into the red.

Property woes deepen

Government has set aside R42bn for housing projects over the next four years and aims to deliver 250 000 houses a year. This, together with the state concept of "breaking new ground" which focuses on integrated housing, supports Calgro M3's business model.

Economic data show many South Africans find it impossible to get a foothold in the property market, while those already in houses are battling to pay instalments as lenders tighten their credit criteria. Auction signs around residential property developments are becoming increasingly common, and the market indicates that times are hard for property developers.

However, since releasing its interims, Lategan, founder Deon Steyn and various members of the Malherbe family - who have significant interest in the company as well as board representations - have been active buyers of nearly R5m shares on the open market at an average price of 56c per share.

Commenting on the possibility of delisting, Lategan said it had "come up for discussion" but one of the aspects that counted against it was the credibility afforded to a listed company. Credit lines were generally better when listed.

Calgro had quite extensive credit lines but it had made good progress in managing its debt: "We are in the process of reorganising the balance sheet and we are on target to settle 99% of our most expensive debt by the end of the financial year," Lategan said.

Calgro M3 is involved in the development of a variety of residential complexes, including low-cost, government-sponsored RDP homes.

Delisting dilemma

But staying listed is an expensive exercise and in the prevailing climate market commentators are battling to find a motivation for buying into the property developer.

The fact that the company is trading at a deep discount to its net asset value and that directors are increasing their stake in the business traditionally suggests that the company could be ripe for a private equity deal, or delisting where better value may be extracted.

Counting against a private equity transaction is the fact that in Calgro's case, a number of directors hold a large amount of the shares.

In terms of existing shareholder structures, the company has 127m shares in issue. Of these, 46m were held by directors at the start of 2008 with Malherbe and Steyn holding about 12m shares each. According to Lategan, after the recent share purchases the directors would now hold about 45% of the issued share capital of the business.

With delistings on the rise and negative market sentiment, many of the smaller players who may be considering an exit from the listed environment are casting their eye toward Reserve Bank governor Tito Mboweni and his rates decision later this week.

The feeling from market commentators seems to be that should the governor fail to cut rates (or should the cut not improve market sentiment), some of the smaller players may elect for the less onerous unlisted environment.

In late trade on Monday, Calgro saw 26 000 shares change hands at an unchanged price of 55c. This was despite a strong showing from the main board, which saw the all-share Index trading up 6.4% (1 :236 points) on the back of a strong showing from resources.

- Fin24.com

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