1Q17 core earnings of RM6.5m came in broadly within our expectations at 32%. No dividends, as expected. Near to mid-term outlook appears unexciting due to its exposure in industrial property and projects concentrated in the Johor region. As a result, we lower our FY17E earnings by 10% to RM18.3mon differed recognitions, and introduce FY18E of RM19.0m. Lower TP to RM1.50 (from RM1.74) on a higher applied RNAV discount of 76% (from 72%) and maintain UNDERPERFORM call.

1Q17 core net profit of RM6.5m came broadly within expectations at 32% of our full-year forecast of RM20.3m, due to lower than expected effective tax rate of 22.4% vs. our FY17E of 30.0%, while we are expecting weaker progress billings from weak sales trajectory in coming quarters, and tax rates to increase closer our FY17E. 1Q17 sales was unavailable, but unbilled sales was at RM134m providing 8- 10 months of earnings visibility. We maintain our FY17E sales target of RM78m for now pending more details from management.

Results Highlights. Topline was down by 13% YoY and 21% QoQ, likely due to slower billing progress from property development and construction segment recognitions, as well as slower demand for the groups industrial properties. As a result, YoY earnings were down by 34% on the back of weak EBITDA margins (-5.6ppt) on weaker margin properties sold, and higher administrative expense. However, QoQ earnings were up by 96% as 4Q16 was an exceptionally weaker quarter on lower margins from; (i) unfavourable product mix (i.e. more higher margin properties sold in 1Q17, more concrete sales) , (ii) higher administrative expense (+70%) in 4Q16, and (iii) higher effective tax rates of 36.3% in 4Q16 on certain expenses which were not tax deductible.

Outlook. We are of the view that the near-to-mid-term outlook for CRESNDO remains unexciting due to its exposure in industrial property and projects concentrated in the Johor region, while the Group remains cautious on launches going forward. Whilst the MYR remains weak, domestic confidence issues are keeping industrial property investors on the sidelines. Expecting sales of RM78-104m in FY17-18E.

Lowering FY17E earnings as we remain cautious on the Johor property market. We are lowering FY17E earnings by 10% to RM18.3m as we have deferred some of this year’s project recognitions, which is based on progress billings to next year as launches will be mostly in 2HFY17, due to a bearish outlook on the Johor property market.

Maintain UNDERPERFORM but lower TP to RM1.50 (from RM1.74) based on a higher RNAV discount (historical peak) of 76% (from 72%) to its FD RNAV of RM6.32. The group has been slowing down on launches, which is not expected to pick up significantly in FY17, while most launches are targeted towards 2HFY17 to avoid holding high levels of stock, due to the slower Johor market. As a result, this has been affecting earnings in recent years, causing net yields to remain low at (2.2%) currently vs. MATRIX (5.7%) and HUAYANG (2.3%). Downside risks to our call include: (i) Stronger-than-expected property sales and (ii) higher than expected administrative costs.

Source: Kenanga Research - 30 Jun 2016