Period    1Q14 

Actual vs. Expectation   1Q14 net profit of RM18.0m was within expectations, making up 24% each of street and our estimates. 

Dividends    None, as expected. 

Key Results Highlights    YoY, 1Q14 earnings rose sharply by 47%, although topline slipped 17% to RM71m. There were less construction billings but more property ones from completed industrial units in NCIP, which carries significantly superior margins. Property EBIT margins actually expanded exponentially by 20.5ppt to 44.8%, resulting in group operating margins improvement of 14.3ppt to 36.6%. 

QoQ, 1Q14 earnings declined by 21%. The property segment saw lower billings (-25%) while segment’s EBIT margins slid 1.2ppt lower to 44.8%. However, it was expected as they were coming-off traditionally stronger 4Qs. 

1Q14 sales of RM62m made up 16% of our FY14E sales of RM380m and were largely driven by NCIP (61% of sales); these also carry historically high EBIT margins of >40%. The proportionately lower sales are expected as its industrial property sales (e.g. NCIP) were more sensitive to GE (May-13). Post GE, we expect demand to strengthen and will maintain our assumptions. The group has another c. RM190m worth of completed industrial products in NCIP. 

Outlook    Notably, 1Q14 EBIT margins of 35.6% are much higher than our FY14E’s 27.3%, leaving further room for potential earnings upgrades. 

Change to Forecasts    No changes to estimates. Unbilled sales of RM133m and completed industrial products in NCIP provide c. 1.5 years visibility. 

Rating  Maintain OUTPERFORM

Valuation    Maintain TP of RM3.56. Rumblings of removal of  DIBS and weak market sentiment have bashed down property stocks and Crescendo has not been spared; but it is unwarranted because Crescendo’s on-going projects are affordable housings and industrial properties, which are NOT sold using DIBS. We are also not worried about the Johor property tax on foreigners (refer below). At current price which implies 5.2% dividend yield and a TP that assumes 30% discount to its FD RNAV of RM5.08, total returns are compelling at 31.9%. This is the only developer whose earnings capture significant industrial property demand in our favourite scene, Johor. We encourage investors to adopt a Buy-on-Weakness strategy, in view of more positive news flow (e.g. RTS). 

Risks    Sector policy risks, which may cause knee-jerks in share prices.

Source: Kenanga