Initiating coverage on Crescendo Corporation (CRESCENDO) with OUTPERFORM and TP of RM3.56 based on 30%* discount to our FD RNAV of RM5.08. We expect CRESCENDO to continue its re-rating process given its unique positioning as a pure Johor-based developer which has sizeable exposure to the Iskandar Malaysia region. They will enjoy resilient demand given that they are positioned for the industrial property and affordable housing plays. CRESCENDO enjoys historically low land cost, which provides it flexibility to keep property pricing competitive or expand its margins. The company has deep value and based on our estimated total remaining GDV of RM7.4b, we believe the company has 8-9 years of earnings visibility which is longer than other larger developers. We expect FY14-15E earnings growth of 31%-34% and attractive net dividend yields of 5.9%-7.5%.

Beneficiary of the Iskandar Malaysia story. In total, the group owns 2983ac which are all in Johor - of which 1663ac is within the Iskandar zone. Most developers with sizeable exposures to the southern region have rallied in share prices this year by 20%-90% in YTD returns. We are bullish on Johor given the G2G collaborations and increasing economic drivers, including the migration of Singaporean SMEs to Iskandar.

Owner of cheap landbanks… Its remaining landbank is extremely undervalued given their average book value cost of RM3.50psf against current valuations of ‘greenfield’ landbanks which are priced at RM8-10psf. Since their land costs are at historical lows, they have the flexibility of expanding their margins by riding on the wave of capital appreciation in Johor or price their products more competitively while reaping decent margins. Notably, its PBT margins have expanded from 16% in FY10 to 28% in FY13.

…provides deep value and strong visibility of 8-9 years. Based on our estimates, we believe the group has a remaining GDV of RM7.4b, which could last the company a good 8-9 years assuming revenue growth of 25% p.a.; this clearly provides longer-term growth prospects than the bigger developers who are facing ‘high base’ effect and visibility of 6-7 years. We also believe the group’s remaining GDV will expand as GDV/ac extraction assumptions are still conservative.

Uniquely positioned as an industrial and affordable housing play. The group enjoys a head-start in terms of industrial parks, namely Nusa Cemerlang Industrial Park and Tmn Perindustrian Cemerlang, which makes up 15% of remaining landbank. These projects are the current major earning drivers of the company, which would make CRESCENDO a proxy of the uptick in Iskandar’s industrial property boom. We also gather than c. 50% of its landbank is positioned for the affordable housing market, which will be a vital demand driver for locals since prices have rallied significantly over the last 12 months. Locals may be priced-out quickly and thus, Crescendo will enjoy resilient demand given that affordable housing products are less sensitive to market cycles and speculation.

Strong earnings growth ahead with attractive yields. We estimate FY31-Jan14-15E earnings of RM73.5m (+32% YoY) – RM98.6m (+34% YoY) based on sales assumptions of RM389m – RM554m. Assuming a 38% PATAMI payout, we derive an attractive FY14-13E net dividend yield of 5.9%-7.5%, which is better than the average FY13/14E mid-cap developers’ dividend yield of 4.6%.

Source: Kenanga