We met up with Crescendo Corporation Bhd (CRESNDO)’s management recently for an update on its prospect, which has further reinforced our positive conviction on the stock. For the near-term, we would see its earnings catching up in 2Q15 and 3Q15 as we expect CRESNDO to be able to recognise the sale of its NCIP inventories and also commercial properties in 1Q15. In the longer term, we would expect CRESNDO to continue with launches in Bandar Cemerlang, Taman Dato Chellam, Desa Cemerlang and Tg Senibong and at the same time building up its recurring income stream. We still like CRESNDO for its low land cost advantage in Johor, which allows for more flexible planning of development projects. Hence, we are reiterating our OUTPERFORM call on CRESNDO with an unchanged Target Price of RM3.15 based on 45% discount to its FD RNAV of RM5.72.

1Q15 was affected by timing of recognition. To recap, 1Q15 earnings came below expectations, although the sales of RM70m were better than anticipated. The weakness was due to the timing of release of the Bumi units and Nusa Cemerlang Industrial Park (NCIP) inventories, resulting in very low property recognition during the quarter. We understand that the Bumi units have been released and thus subsequent quarters will show stronger results as they would be able to progressively recognise its residential and commercial projects in Taman Dato Chellam (TDC) and NCIP inventories.

Better quarters ahead thanks to spillovers from Ascendas-UEMS Nusajaya Techpark. We gather that the group has achieved c.RM20m sales for the first half of 2Q15, which was driven largely by sale of their NCIP inventories, implying good chance that 1H15 sales will be close to c.50% of our full year target. NCIP’s next-door neighbour, Nusajaya Techpark @ Gerbang Nusajaya by Ascendas-UEMS recently did their groundbreaking ceremony and is in the midst of locking-in buyers. However, Nusajaya Techpark will be picky with its buyers as it has stringent screening requirement. As for investors’ preference for a cheaper option, NCIP’s pricing is 10%-30% lower than Nusajaya Techpark.

Well prepared for the next growth phase. Over the next two years, CRESNDO will launch GDV of more than RM800.0m planned launches and will be driven by a balanced mix of industrial properties (51%), residential and township products (49%) across Johor. Key launches in the next two years are: (i) industrial properties in NCIP, TPC (GDV:RM400m), (ii) mass township products include landed residentials and shoplots from their new township, Bandar Cemerlang, and on-going townships (TDC, Desa Cemerlang) (GDV:RM300m), (iii) commencement of their Tj Senibong project (GDV:RM132m), and (iv) maiden NCIP condo JV which we estimate to be at around RM150m for Phase 1. We think that CRESNDO is well prepared for the next phase of growth due the well balanced mix of planned product launches (industrial and mass housing) as compared to more industrial-oriented development previously.

FY15 sales target achievable. Post our meeting with management, we think that our FY15 sales target of RM210.0m is achievable, given that CRESNDO currently has c.RM115m worth of inventories ready to be sold and NCIP makes up the bulk of it (RM93.0m) coupled with its planned residential project launches in Bandar Cemerlang (GDV: RM76m) and Tj Senibong (GDV:RM132m) which still enjoys resilient demand as it is still within the affordable segment. While we believe that FY15 sales are achievable, as CRESNDO has registered RM20m of sales in early 2Q15, FY15 earnings would be rather flattish due to the mix of properties sold due to the compression in margins on lesser industrial properties as compared to FY14.

Could RNAVs go higher? Management has not guided us on updated GDV for the new projects, namely BC and Tj Senibong. Our current FD RNAV of RM5.72 assumes that BC and Tj Senibong have GDV of RM3.8b-RM0.7b, respectively. However, we have revisited some of our assumptions and based on the updated information, GDV of BC and Tj Senibong could increase to RM6.1b-RM4.6b. This would potentially increase our FD RNAV by from RM5.72 to RM7.08 should we include the upward revision on both of these lands, implying a fair value of RM3.89 based on unchanged 45% discount to its FD RNAV.

OUTPERFORM maintained. Although their RNAVs could be higher, we maintain our estimates for now, pending final approvals. We continue to reiterate our OUTPERFORM call on CRESNDO with an unchanged Target Price of RM3.15 based on 45% discount to its FD RNAV of RM5.72. Although the stock is heavily exposed to Johor, the applied discount reflects average historical levels because of their product positioning as an industrial and mass housing player with large exposure to landed residentials, which should see resilient demand.

Bandar Cemerlang, a tale of two districts. We gather that the Bandar Cemerlang (BC) project is spread across two different districts, namely Tebrau (864 acres, estimated GDV: RM3.0b) and Kota Tinggi (526 acres). The Tebrau portion of BC is approved for township development. Currently, management is proposing to the state administration to rezone the Kota Tinggi portion as industrial development, which is keeping with earlier guidance. Should CRESNDO be able to develop industrial properties in Kota Tinggi, it could further enhance its current estimated GDV of RM0.7b to RM3.0b, based on our conservative ASP assumption of RM300psf, and 50% utilization rate its Kota Tinggi land. Bandar Cemerlang township maiden launch will be in 4Q15 and Phase 1 (GDV: RM76m) will feature landed residentials in the mass housing space.

Tanjung Senibong, development by the bay. CRESNDO has reclaimed 90acres of net land for mainly commercial development. However, in the initial phase of Tj Senibong CRESNDO would launch 880 units of “affordable” housing at RM150k per unit with an estimated GDV of RM132m over 10 acres of land and subsequently develop the remaining 80acres with commercial properties. However, we do note that Phase 1 of Tj. Senibong will see very thin margins, catering for the state requirements to increase ‘low-cost’ housings. Overall, we estimated GDV of RM4.6b for Tj Senibong, which is based on 4x plot ratio and 60% utilization rate, pegged to a conservative ASP assumption of RM550psf and we expect margins for subsequent phases to improve as it would have more commercial components. However, management indicated that they would prefer a joint-venture partner for Tj Senibong given the size of the project. In NCIP, CRENSDO plans to launch its first joint-venture apartment project in early CY15 as management expects to obtain the building plan’s approval by Aug/Sep 2014. Management is looking to price its service apartment (500sf-1300sf) at ASP of RM600-700psf, which is still comparable with its surrounding developments like EcoBotanic, Horizon Residence, Sky Loft Premium Suite coupled that it is just a throw stone away from EduCity. We are expecting the GDV for Phase 1 to hover around RM150m. Although pricing per unit will be below RM1m/unit, the project can still be sold to foreigners as they obtained the relevant approvals before 1 May 2014.

Recurring income stream, the longer-term picture. Moving forward, management intends to grow its recurring income stream through investment properties. Hence, management is looking to keep approximately 23 units of industrial properties in NCIP for that purpose. Currently, management has 8 units already completed and expecting another 3 units to be completed soon. Based on rental psf of RM1.60, these 11 units of industrial properties would easily generate a rental income ranging between RM13.0 – RM15.0m per annum starting from FY16 onwards. Management indicated once all these 11 units have been fully rented out; they would begin to construct the remaining 12 units, which could easily double its rental income to RM26.0m – RM30.0m.

FY15 earnings to be flattish. We would expect CRESNDO’s FY15E earnings to be rather flattish despite a revenue growth of 7.5% due to compression in margins due to mix of properties sold. CRESNDO’s residential and commercial property sales make up 70% of its 1Q15 total sales of RM70m vis-à-vis 13% of its total sales of RM62m in 1Q14. Generally, residential and commercial property margins tend to be lower as compared to industrial properties. As for FY16, we are factoring in the recurring income stream into our estimates, which would further boost our FY16E earnings by 3%. However, we are also lowering margin assumption for the property development division due to the higher mix of residential and commercial properties. Hence, the net impact is not significant to our FY16E earnings.

Source: Kenanga