Period  2Q15/1H15

Actual vs. Expectations Crescendo Corporation (CRESNDO)’s 1H15 core earnings of RM20.1m only accounted for 24% of our full-year forecast while making up 29% of streets’ estimates. While its 1H15 performance appears to be disappointing, we deem this as broadly within expectations as: (i) more billings of higher margin products are expected in 2H15 and (ii) CRESNDO declared a single-tier interim dividend of 7.0 sen that makes up 46% of our full-year dividend expectations, implying that they are confident of meeting our FY15E estimates.

 On another positive note, its 1H15 sales of RM140.0m already made up 67% of our full-year sales forecast of RM210.0m.

Dividends  CRESNDO declared a single tier interim dividend of 7.0 sen as expected which was well within our full-year estimates of 15 sen, which still offers a decent yield of 5.4%. Our assumption is based on 38% PATAMI payout, or similar to previous years’ levels.

Key Results Highlights YoY, 1H15 core earnings of RM20.1m saw a decline of 54% from RM43.9m previously, underpinned by 23% decrease in revenue as a result of lower revenue from its property division (-17%). Subsequently, its property division’s operating margin was compressed by 19.7ppt to 28.6% as there was less recognition of billings from industrial properties which commands higher margins as compared to township products.

 QoQ, 2Q15 core earnings improved significantly by 163% from RM5.5m to RM14.6m. While the increase in core earnings were driven by 36% improvement in revenue to RM69.6m, its EBITDA margin expanded by 11.7ppt to 33.7% because the quarter saw more industrial property inventory sales. In 2Q15, Nusa Cemerlang Industrial Park inventory sales increased by 26% from RM19.0m to RM24.0m, coupled with another RM25.0m new sales from its Taman Perindustrian Cemerlang project near Ulu Tiram.

Outlook  While the Johor property market might seem to be oversupplied with higher-end high rise developments, CRESNDO’s outlook remains intact with c.RM850.0m worth of property launches planned over the next two years. These launches are well balanced between industrial and mass township projects (50:50). Its residential project, namely Bandar Cemerlang (GDV: RM3.0b), will feature mainly affordable landed residentials priced below RM500k/unit to tap onto the ever hungry mass market; the project is targeted to be launched in early 2015.

Change to Forecasts No changes to our FY15-16 earnings estimate as we are expecting a stronger 2H15 performance. Unbilled sales have improved by 29% to RM128.0m from last quarter and would provide earnings visibility for another year.

Rating UNDER REVIEW

Valuation  We are placing our recommendation and Target Price UNDER REVIEW at this juncture pending our upcoming sector report. Our previous call was OUTPERFORM while TP was pegged at RM3.15 based on discount of 45% on our FD RNAV of RM5.72.

Risks to Our Call Unable to meet its sales target.

 Sector risks, including further negative policies.

Source: Kenanga