CRESCENDO (CCDO.MK, CREC.KL) 8 May 2013 Attractive proxy to the ascendancy of industrial property in Iskandar Company report BUY

Hoy Ken Mak (Initiation) [email protected] +603 2036 2294 Rationale for report: Initiating coverage

Price RM2.73 Investment Highlights Fair Value RM3.50

52-week High/Low RM2.73/RM1.68 • We initiate coverage on Crescendo Corp with a fair value Key Changes of RM3.50/share on a 45% discount to our NAV of Fair value new RM6.36/share. -based Crescendo is the premier EPS new developer of industrial property in the state.

YE to Jan FY13 FY14F FY15F FY16F • We forecast core earnings to accelerate from RM56m in FY13 (Jan) to RM85mil in FY14F, and rising by a CAGR of Revenue (RMmil) 282.6 310.4 387.9 515.9 34% to RM134mil in FY16F. This robust growth is Core net profit (RMmil) 55.7 84.7 109.4 134.3 Core FD EPS (Sen) 19.7 29.9 38.7 47.6 underpinned by sustained strong demand for its flagship Core FD EPS growth (%) (9.2) 52.0 29.5 23.0 Nusa Cemerlang Industrial Park (NCIP: 523 acres) where it Consensus EPS (Sen) 35.0 41.3 41.0 has already pre-built RM220m of industrial property ready DPS (Sen) 12.0 13.0 14.5 17.5 to launch. Core FD PE (x) 8.9 9.1 7.1 5.8 EV/EBITDA (x) 5.2 4.9 4.3 3.5 • Crescendo offers an attractive direct leverage to the Div yield (%) 6.9 4.8 5.3 6.4 ascendancy of industrial property in Johor where the ROE (%) 9.4 12.9 14.2 15.4 Net Gearing (%) 14.1 7.7 1.7 0.1 relocation of SMEs from Singapore would accentuate demand expansion. As it is, SMEs from Singapore account Stock and Financial Data for 56% of its sales at NCIP.

Shares Outstanding (million) 195.5 • The entry of Singapore's industrial park developer Market Cap (RMmil) 533.7 Ascendas (via a JV with UEM Land) to develop Gerbang Book value (RM/share) 3.05 Nusajaya – located next to NCIP, would further underscore P/BV (x) 0.9 ROE (%) 9.4 newsflow momentum by broadening the clientele base. Net Gearing (%) 14.1 • NCIP aside, Crescendo would also be fast tracking the Major Shareholders Gooi family (63.7%) development of its new industrial project – Bandar Public Small Cap Fund (3.6%) Cemerlang (1,300 acres), where it is setting aside some 500 acres for industrial property. Maiden launch is Free Float (%) 77.9 expected by 1H 2014. The imminent launch of Bandar Avg Daily Value (RMmil) 1.3 Cemerlang would more than double its presales of Price performance 3mth 6mth 12mth industrial property, currently coming from NCIP and Taman Perindustrian Cemerlang (TPC). Absolute (%) 34.7 28.7 28.7 Relative (%) 30.6 26.4 21.7 • This aside, Crescendo also has one strategic parcel of land within the area (CLSB: Sg.Rekoh) where the 4.00 1,866 development potential is very high due to its highly populated catchment areas. Reclamation works for this 222-acre site is expected to complete year-end. 3.00 1,640 • We are forecasting its presales to surge from

0.00 M N M N M N M N M N M 961 Crescendo has a decent dividend policy of 30%. At current a o a o a o o a o a y v y v y v ya v y v y ------1- - - - levels, its dividend yield is forecast at 5%-6%. 80 80 90 90 01 01 1 1 21 21 31

Crescendo FBM KLCI • Valuation is very attractive from both the earnings and assets standpoint. It is trading at 10% discount to its historical book value of RM3.05/share, and a deeper discount of 57% to our NAV of RM6.36/share. FD FY14F- PP 12247/06/2013 (032380) 16F PE is only at 6x-9x, with EPS CAGR of 34%. Crescendo Corporation 8 May 2013

TABLE 1: DERIVATION OF FAIR VALUE

Division Value (RM) Breakdown SizeMarket Value (RM) mil /share of NAV (%) Landbank (acres) psf mil Taman Perindustrian Cemerlang (TPC) 143 30 187 Desa Cemerlang (DC) 102 25 111 CLSB land 222 8 77 Taman Dato Chellam (TDC) 33 18 26 Bandar Cemerlang (BC): Tebrau 864 13 489 : 526 6 137 Others 15 5 3 Nusa Cemerlang Industrial Park (NCIP) 276 43 517 Ambok Resorts 794 6 208 Total property division 1,755.7 6.20 97.4

Construction division (5x average 3-year net profit) 0.7 0.00 0.0 Manufacturing & trading (6x average 3-year net profit) 24.9 0.09 1.4 Management services & 0thers (5x average 3-year net profit) 13.9 0.05 0.8 FY13 Net Debt (84.2) (0.30) (4.7) Gross Sum-Of-Parts (SOP) 1,710.9 Add: Proceeds from assumed conversion of RCULS/warrants/ESOS 88.2 0.31 4.9 Interest from assumed conversion of RCULS/warrants/ESOS 3.0 0.01 0.2 SOP 1,802.1 6.36 100.0 FD no of shares (mil) 283.4 SOP/share 6.36 Fair value (45% discount to SOP) 3.50 Capital gains (%) 27.2 FY14F yield (%) 4.7 Total return (%) 31.9

Source:Crescendo, AmResearch

INITIATING COVERAGE WITH A BUY The 45% discount that we have attached to Crescendo’s NAV is larger compared to an average of 15%-25% for its  Fair value pegged at RM3.50/share larger peers under our coverage universe (i.e. IJM Land, Mah Sing and UEM Land). We initiate coverage on Crescendo Bhd with a fair value of RM3.50/share. This pegs the stock at a 45% discount to We expect the discount rate to narrow with its estimated Net Asset Value (NAV). We value the Crescendo’s emerging status as a proxy to rising following four core business divisions using the following industrial land prices in IM amid a strong pipeline of parameters: landbanking newsflow. Visibility would be further enhanced with the listing of Iskandar Waterfront (i) Property division: We appraise Crescendo’s Holdings (IWH) (See Table 1). undeveloped landbank based on market values that range from RM5psf to RM43psf. The property assets account for the bulk of Crescendo’s NAV at RM1.8bil or a majority 97% of the total. 10 KEY SELLING POINTS

(ii) Construction/manufacturing division: These two Below, we highlight the main attributes of Crescendo: support businesses – mainly undertaken through the Unibase group – is valued based on a target PE of 5x- (i) Crescendo owns 2,975 acres of landbank in Johor, 6x on their respective average three-year net profits of which 56% are located within the boundaries of (1.4% of NAV). (IM) with excellent road and air connectivity to and from JB city/ Singapore (mostly (iii) Management services & others: The key contributor 10-20 minute drive) (See Chart 1, Table 2). within this division (valued at a target PE of 5x) is Crescendo International College), although overall contributions are still small at < 1% of NAV.

AmResearch Sdn Bhd 2 Crescendo Corporation 8 May 2013

CHART 1: LOCATION OF LANDBANK

Source:Crescendo, AmResearch

(ii) At an average of c.RM18psf, Crescendo’s (vi) Further NAV upside could come from the unlocking remaining landbank (including completed units and of two strategic pieces of land in Tebrau and infrastructure works for select projects) implies for high-end waterfront developments. significant upside amid rising land prices in IM. Reclamation works for the former (Sg.Rekoh) are to These land parcels were last re-valued between be completed by year-end. The latter (Ambok 1996 and 2006. Resorts) is to be launched in six years’ time to ride on PETRONAS’ RAPID project. (iii) For instance, the book value for its flagship Nusa Cemerlang Industrial Park (NCIP) is still carried at (vii) Crescendo has enjoyed strong pre-tax margins of only RM16psf compared with the market rate of as 40%-50% for its industrial factories. We attribute high as RM70psf-RM75psf for comparable this high margin extraction rate to the group’s (i) low industrial land in Nusajaya. landbank cost; (ii) in-house construction/building material supplies set-up; and (iii) hands-on (iv) Crescendo is primed to catch the early wave of an management. industrialisation drive in Nusajaya, with close to one-third of its landbank (~919 acres) earmarked (viii) Crescendo is trading at 0.9x its FY13 BV, and at a for industrial properties. deep 57% discount to its estimated NAV of RM6.36/share. (v) This is timely where interest among Singaporean SMIs is gaining traction. Further out, Crescendo’s We project core earnings to rise 52% YoY to NAV is likely to get a significant kick from the RM85mil in FY14F (FY13: RM56mil); rising further imminent entry of Singapore’s Ascendas (via a JV to RM109mil and RM134mil respectively in FY15F- with UEM Land) to co-develop an industrial park at 16F. The strong earnings visibility is underpinned Gerbang Nusajaya, located right next to NCIP. by a 4x jump in FY14F-15F new sales of RM384mil

AmResearch Sdn Bhd 3 Crescendo Corporation 8 May 2013

-RM397mil. Management is guiding for RM1.2bil a few measures. One of them is to recycle oil industrial worth of new launches during this period. areas for new housing projects.

Poignantly, Crescendo has c.RM220mil of In order to achieve social-political balance and ensure completed industrial units at NICP which can now local employment, the Singaporean government s’ policies fetch higher selling prices from FY14F onwards. have recently skewed towards a push for mechanisation and higher duties for foreign workers by 2015. (ix) Backed by a light balance sheet (FY14F net gearing: 8%), Crescendo also appeals as a high- As a result, the IM region has been a net beneficiary of yielding stock at 5%-6% tax-exempt – the highest increasing industrial demand from SMEs across the within our property stock universe based on a causeway. minimum pay-out of 30%. Our recent ground checks on several leading industrial parks also confirm this positive trend, where Singaporean SMIs account for at least half of the DEEP VALUE PLAY ON RAPID buyers. INDUSTRIALISATION DRIVE WITHIN IM (1) SBB 1 & 2  Surging industrial demand SP Setia’s business park, located next to Setia Eco After reaching its tipping point 2012, the IM juggernaut is Gardens, has seen all of its non-bumi units fully-taken up. forging ahead towards its next phase of growth – with emphasis on job creation and population destiny. These are semi-detached factories with built-ups ranging from 3,000sf to 4,000sf. The price has also appreciated to Naturally, the industrial segment – which is a main driver of over RM300psf from its maiden launch of RM200psf. At job growth – has been in the spotlight. This comes at an typical detached unit can cost close to RM9mil at the going opportune time, where IM is clearly benefiting from the market rate. rising relocation of Singaporean SMEs into Johor. The buyers of these factories are mostly SMEs from The Singapore government has projected a 30% increase Singapore who have shifted to Johor due to the cost in its population base to 6.9 million by 2030 (currently: 5.3 pressures articulated above. million), including an increasing number of foreign workers. The buyers of these factories are mostly SMIs from To this end, the Singapore government is planning to Singapore who have shifted to due to the cost pressures create an additional 5,600ha of land to support its rapidly- articulated above. Interestingly, some of the owners have expanding populace. Of this, industry & commerce also purchased residential units at Setia Eco Gardens – accounts for the joint-second highest usage at 17% along perhaps to stay during the weekdays. with housing after defence (19%) (See Chart 2).

The Island republic is also aiming to re-look its land use via

TABLE 2: DETAILS OF LANDBANK

Project Remaining landbank Area District Tenure Type Distance from JB (acres) (km) Nusa Cemerlang Industrial Park (NCIP) 276 Pulai Freehold Industrial 30 Taman Perindustrian Cemerlang (TPC) 143 Johor Bahru Freehold/Leasehold Industrial/Commercial 16 Desa Cemerlang (DC) 102 Plentong Johor Bahru Freehold Residential/Commercial 16 Taman Dato Chellam (TDC) 33 Tebrau Johor Bahru Freehold Residential/Commercial 18 Bandar Cemerlang (BC): Tebrau 864 Tebrau Johor Bahru Freehold Mixed 20 : Kota Tinggi 526 Kota TinggiJohor Bahru Freehold Mixed 20 CLSB land (Sg.Rekoh) 222 Tebrau Johor Bahru Leasehold Mixed 18 Ambok Resorts 794 Tg.Surat Kota Tinggi Freehold Resorts/Mixed 67 Others 15 Plentong Johor Bahru Feehold/Leasehold Residential 20 Total 2,975 Land within boundary of Iskandar Malaysia: acres 1,655 : % 56 Notes: * Final conversion and sub-division approval ** Development rights through privatization agreement

Source:Crescendo, AmResearch

AmResearch Sdn Bhd 4 Crescendo Corporation 8 May 2013

CHART 2: SINGAPORE LAND REQUIREMENTS: 2010 VS 2030 (ha) 16,000 19%

14,000 19% 17% 17%

12,000

14% 14% 13% 13% 10,000 12% 8,000 9%

8% 6,000 8% 7% 6% 5% 5% 4,000 4% 3% 3% 3% 2,000

0 Housing & Industry commerce reserves& nature Parks & institution Community, (e.g. power, water & Utilities Reservoirs transport Land infrastructure & Ports airports requirements Defence Others recreation facilities recreation treatment plants treatment

2010 2030

Source:Crescendo, AmResearch

With SBB I a sell-out, S P Setia had already moved on to the timing impeccable now that pricing trends have launch Setia Business Park II (SBB II) along the Tebrau improved considerably and are likely to continue. Corridor in late-2012. The projected GDV is around RM1bil on 262 acres of land (244 units). We were made to Designed as a guarded park with two main entrances, understand that the average pricing for these units is NCIP offers a total of 353 units of detached and semi- slightly lower than that of Setia Business Park I – with detached factories that focus on ‘green technologies’. selling prices likely to remain above RM300psf. Excellent road connectivity is one of the 527-acre NCIP’s (2) Mah Sing main selling points. The industrial park is a mere 10-minute drive from Tuas in Singapore via the Second Link, (which it Mah Sing launched [email protected] in the middle of fronts) and is also located right next to the last year. The initial offerings are 25 units of detached interchange of the PLUS highway. (from RM2.6mil to RM4.3mil) as well as semi-detached variants with built ups of 5,075sf (from RM1.6mil) and Meanwhile, all basic infrastructure such as electricity, 6,475sf (from RM1.8mil), respectively. water, waste disposal system (50,000-PE central sewerage treatment plant) and telecommunications (TM Being currently the only sizeable freehold industrial project and Time Dot Com fibre optic cable networks) have near PTP (5 minutes away) with free zone status, we already been installed (See Chart 3). expect the project to be well-received. As at 31 March 2013, NCIP has completed 174 units of  NCIP a price setter: RM220mil inventories ready factories with a GDV of RM527mil. for sale More importantly, we understand that prices of industrial Similarly, our recent visit to Crescendo revealed a similarly properties within JB had moved up again in 2H12, ever robust trend for its industrial parks. Crescendo took the since Crescendo Holdings started to raise it to ~RM350- bold step of stepping up its average pricing for industrial RM370psf from the RM200psf++ range over at its Nusa parks to ~RM350psf in 2H12 from the JB market average Cemerlang Industrial Park, located next to Gerbang of ~RM200psf-RM250psf in 1H12, with its flagship Nusa Nusajaya. This, in turn, has prompted other developers Cemerlang Industrial Park (NCIP) fetching the highest such as SP Setia and Mah Sing to follow suit. range.  Ascendas to provide another leg up While the initial response was tepid, Crescendo’s tactical bet appears to have been proven right when other rival During our last visit, management opined that while it has industrial parks such as SBB 2 and i-Parc have since been pricing up its industrial products for the past two followed suit with a step-up in prices. years –the momentum has gained steeper traction over the past six to nine months. Reflecting its growing prowess, Crescendo has some RM220mil worth of completed some factory units at NCIP Ranging ~RM350psf, prices of factory units at NCIP have that it held back in 2H12 that are now ready to be sold – doubled on average since it made its debut launch back in 2007 at ~RM150psf-RM200psf.

AmResearch Sdn Bhd 5 Crescendo Corporation 8 May 2013

CHART 3: LOCATION OF NUSA CEMERLANG INDUSTRIAL PARK (NCIP)

Source:Crescendo, AmResearch

As a further boost, the presence of Singapore’s Ascendas plating/stamping, machinery, oil & gas equipment in UEM Land’s Gerbang Nusajaya - located right next to makers and bio-tech (See Table 3, Chart 4). NCIP – should help accelerate the latter’s development potential. This bodes well for Crescendo’s industrial land, which makes up ~31% of its remaining 2,975-acre landbank. Ascendas had signed an MoU with UEM Land last October to establish a RM3.8bil-GDV eco-friendly tech park at TABLE 3: INDUSTRY MIX AT NCIP Gerbang Nusajaya under a 60:40 JV. We gather that land clearing work on Phase 1 is set to kick off by the end of Industry Country of origin this year ahead of its completion by 2017. Engineering Malaysia, Germany Metal plating Malaysia, Germany We see the imminent entry of Ascendas as a testimony to the Singapore government’s growing confidence in Metal stamping Malaysia, Singapore the IM region – and an implicit endorsement for Corrugated packaging Malaysia Singaporean SMEs to consider moving into the region Machinery Singapore to mitigate rising operational cost. Oil & gas equipment manufacturer Malaysia Rubber manufacturer USA This comes amid growing bilateral ties between Malaysia and Singapore that have been further cemented by a Bio-tech Malaysia growing influx of investments into IM that are led by other Injection moulding Malaysia, Singapore Singapore government-backed entities (i.e. Temasek, Food Malaysia, Singapore Capitaland) as well as joint-initiatives to construct the KL- Air conditioner Malaysia, Singapore Singapore High Speed Rail and the JB-Singapore Rapid Confectionery Malaysia, Singapore Transit System (RTS). Garment Malaysia Indeed, the relocation of Singaporean SMEs is real and Can manufacturer South Korea increasingly visible. Gypsum board Malaysia Pets food manufacturing UK Even prior to news of the Ascendas-UEM Land JV at Electrical components SIngapore Gerbang Nusajaya, Singaporeans already top the list Printing Singapore, Germany of buyers at NCIP with a commanding 56%, followed by local investors (31%) and the US (6%). These Source:Crescendo, AmResearch buyers come from a myriad of medium-scale industries that include engineering, metal

AmResearch Sdn Bhd 6 Crescendo Corporation 8 May 2013

CHART 4: INVESTORS AT NCIP BY COUNTRY (%) industrial land in Johor have more than doubled over the last two to three years – surging as high as RM70psf- 1 1 1 RM75psf. Even prices for UEM’s Southern Industrial Logistics Centre (SiLC) have moved north of RM50psf. 4 6 This implies more upside to our valuations, where we 31 have assigned lower prices of RM30psf and RM43psf in valuing TDC and NCIP. Both projects make up RM2.48/share or 39% of our NAV.

 High gross profit margins of 30%-50% for industrial products

We draw comfort that Crescendo has enjoyed strong gross 56 profit margins of 30%-50% for its industrial factories. We attribute this high margin extraction rate to the group’s:-

(i) Low landbank cost: (vacant lots – RM8psf; work-in- progress – RM3psf-16psf; completed lots – RM24psf- RM41psf).

(ii) Custom-made features (i.e. built-up to customers Korea Taiwan Indonesia Germany US Singapore Malaysia specifications) or sale of industrial lots that are tied with long-term tenancy agreements

Source:Crescendo, AmResearch (iii) In-house construction/building material supplies set- Apart from NCIP, the group has another industrial plot in up (via the Unibase group). Plentong named Taman Perindustrian Cemerlang (TPC) that has 143 acres remaining. Another 500 acres could be (iv) Hands-on management led by major-controlling carved out from the upcoming Bandar Cemerlang (BC) shareholders, the Gooi brothers. township in . Crescendo is fast-shaping up as an emerging proxy to  More pricing upside to come the burgeoning Iskandar Malaysia (IM) corridor, particularly its prowess as key developer of industrial Even though prices of industrial lots within IM have properties within this region. Here are a couple of key enjoyed a strong upward trajectory in recent months, we points underpinning our bullishness on the stock: foresee more upside forward – especially with Ascendas coming in.  Bandar Cemerlang – new kid on the block

Moreover, the Johor industrial market upcycle is only into Bandar Cemerlang is a former palm oil estate, which the its second year compared to more than five years for the group acquired back in 2001. The carrying cost for the land Klang Valley and Penang. – split between Tebrau (864 acres) and Plentong (526 acres) - is only RM3psf (See Chart 5). For completed factory units, the average selling price per built-up is between RM275psf-RM360psf on both Bandar Cemerlang is located in Ulu Tiram with an leasehold/freehold types. Comparatively, the price indicative GDV of over RM3bil that would provide earnings discount viz-a-viz other key markets are as follow: visibility over the next 12 to 15 years. Crescendo intends to Singapore (83%); Klang Valley (51%) and Penang (40%) develop the said land into a self-contained township with (See Table 4). mixed development features.

Meanwhile, our checks indicate that the going-rates for BC was initially supposed to be launched back in 2012 but was held back as management sought to review some of TABLE 4: INDUSTRIAL LAND PRICES BY REGION the project’s products/features to better reflect the booming trends within IM. Area Type Ave.selling price Largest Discount between Johor (RMpsf)/built-up vs other areas (%) The re-planning process is due to be completed by end- Johor Leasehold/ 275-360 2013 ahead of the project’s maiden launch sometime in Freehold mid-2014 (2QFY15). Earthworks are on-going.

Klang Valley Freehold 465-560 (51) We gather that Phase 1 would comprises double-storey and cluster semi-detached houses targeting the mid- to Penang Leasehold 220-460 (40) upper-middle class segments. By and large, we are reasonably comfortable with BC’s Singapore Leasehold 1,265-1,585 (83) future projects. Apart from its low land cost (which gives Source:Crescendo, AmResearch

AmResearch Sdn Bhd 7 Crescendo Corporation 8 May 2013

CHART 5: LAYOUT PLAN FOR BANDAR CEMERLANG (BC)

Source:Crescendo, AmResearch

Crescendo the flexibility with product pricing), BC is within The idea is to tap into growing population maturity within range of other matured townships such as Austin Heights the Nusajaya area for higher GDV attraction, Management (Mah Sing), Setia Eco Kaskadia (SP Setia), Taman sees a lack of commercial products to serve the various Pelangi Indah, Taman Bestari Indah (KSL) and Desa catalyst projects that are already off the ground (e.g. Tiram (Pelangi-Kulim JV). Legoland, Afiat Healthpark, EduCity) as an opportunity.

BC is also a 20 minutes’ drive-away to JB City Centre via The remaining 10%-20% is to be kept for industrial the Eastern Dispersal Highway (EDL), while accessibility factories that are to be leased out, where current yields into the township has also improved with the completion of within the vicinity can still fetch 5%-6% despite rising the Ulu Tiram interchange on the new JB-Kota Tinggi prices. highway in June 2011. Beyond NCIP, Crescendo has under its wraps, two  Moving up the value chain; two new exciting high- waterfront developments that will likely leave an indelible end waterfront projects in the pipeline mark towards its progression as a high-end developer:

Management stressed that industrial properties would (I) CLSB Land (Sg.Rekoh, Tebrau) remain as the group’s bread-and-butter in the near term. But, like all progressive developers – the mid-to-longer This tract of land (99 years) is located within term focus is to move into the high-end Sg.Rekoh in , Tebrau. It is held under residential/commercial segment. Crescendo Land Sdn Bhd (CLSB), a 90%-owned unit of the group (See Chart 6). Up until recently, Crescendo’s residential/shop office products have mainly catered to the medium-end segment On-going reclamation works on is scheduled to be of the local populace – including first-time home owners. completed by year-end. Together with infrastructure works, the total preparatory cost is ~RM20mil. This could be found in their earlier launches in Desa Cemerlang (DC) – located next to TPC and Taman Dato’ The construction of a dedicated interchange Chellam in Tebrau. The price range for residential units is connecting the development to the JB- normally below half a million ringgit. highway has been completed. It is also accessible to JB city centre via the EDL (18km). Fast-track to FY14, management is mulling over plans to convert some 80%-90% of its remaining NCIP landbank The entire development would comprise 2,413 units of (276 acres) originally earmarked for industrial lots into residential properties, 290 units of shop offices and commercial units. approximately 50 acres of commercial land.

AmResearch Sdn Bhd 8 Crescendo Corporation 8 May 2013

CHART 6: LAYOUT PLAN FOR CLSB LAND – SG.REKOH, TEBRAU

Source:Crescendo, AmResearch

The group targets to launch this township within the Closer to CLSB area, we understand that next one to two years. Phase 1 is to comprise carrying values for gross land within the affordable medium-cost flats and shop houses. Tebrau/Plentong belt (to the east of , 10 minutes’ away) range between RM12psf- We believe the project would be well-received on RM22psf. three counts:- The land cost for Senibong Cove (50:50 JV - The project is comfortably nestled within the between Australia’s Walkers Corp and IWH) was matured Permas Jaya area, which is known to around RM12psf-RM15psf; RM16psf for Tebrau have large middle class segment. Some of the Teguh’s 940-acre landbank; and RM22psf for amenities nearby include an AEON shopping mall 227-acre Tropicana Danga Cove (50:50 Dijaya- and a future 1.5 mil sq ft NLA megamall within IWH JV), based on details from the asset the integrated Southkey development (70:30 JV injection exercise by Dijaya’s major shareholder between IGB and Selia Pantai. into the group last year

- With the right JV partners, the project can be re- (II) Ambok Resorts positioned for prime waterfront living – given its strategic location along the Tebrau/Senibong The 794-acre Ambok Resorts has been zoned for coast line that runs adjacent to Singapore. mixed development purposes.

- Land values within JB’s prime waterfront belt are The land, located at the tip of Sg.Labam, is primed for soaring, primarily driven by a few prolific resort/leisure homes, given its proximity to the Desaru landbanking deals totalling more than RM2bil tourism enclave and the booming town. over the past few months. It is located along the Desaru Expressway Compared to book value of RM3psf for the CLSB, (SDE), roughly 7km-away from the Cahaya Baru toll. Land prices along the main Danga bay belt are The completion of the Sg.Johor Bridge in tandem with pushing above the RM300psf levels – with the the opening of SDE is also expected to help drive land highest being the acquisition by China’s Country values within this area. Gardens for RM376psf last December, although the allowable plot ratio is high at an average of 4x (seafront: 6x).

AmResearch Sdn Bhd 9 Crescendo Corporation 8 May 2013

CHART 7: LOCATION OF AMBOK RESORTS

Source:Crescendo, AmResearch

Furthermore, there have been proposals to expand - Given the expected proliferation of oil & gas the access roads leading to the development – investments into Pengerang, we also understand including the expansion of the existing two-lane that plans are afoot for the creation of a -Kg. Sg. road into a four-lane dedicated deepwater port and power plant to driveway. service this area.

Ambok Resorts is suitably positioned to ride on the Management is in the midst of finalising the layout expected uptick in demand for housing and leisure plans for Ambok. While it is only envisaged to kick-off activities within PETRONAS’ massive RAPID project, in six years’ time, we see deep long-term value in the as well as other planned oil & gas projects in project. Pengerang:- Ambok Resorts is carried in its books at only RM1psf - The RAPID project in Pengerang is scheduled to on a raw land basis, just a tad below IJM’s Sebana take-off by 2015, creating at least 20,000 jobs Cove (RM2psf). But the market value for converted during the construction phase and another 4,000 land is already far higher at RM16psf – based on the potential jobs for highly-skilled workers when the deal signed between Khazanah Nasional and UEM facility is ready. Land to co-develop 679 acres of land in Desaru.

- Dialog Group has teamed up with Vopak Asia Ltd The said land – which includes the construction of to co-develop an independent deep water two-18 hole championship golf courses and four petroleum terminal that scheduled to draw RM6bil theme parks in addition to resort homes – forms part in investments over the next ten years along with of Khazanah’s plans to transform Desaru into a leisure 800 jobs. and tourism hub in Johor (See Chart 7).

Dialog has also teamed up with Vopak and the Johor government again for a RM4.1bil investment in liquefied natural gas (LNG) OTHER DIVISIONS terminal.  Construction & manufacturing division - Benalec Holdings holds the concession rights to develop 1,760 acres of prime sea-fronting land The construction and manufacturing segments are mainly into an integrated marine and oil hub. consolidated under the Unibase group of companies. Unibase commenced operations in August 1989.

AmResearch Sdn Bhd 10 Crescendo Corporation 8 May 2013

PICTURE 2: UNIBASE PRODUCTS PICTURE 3: UNIBASE PRODUCTS

Source:Crescendo, AmResearch Source:Crescendo, AmResearch  Management services and others While its primary purpose is to support the in-house property development activities of the Crescendo group, it The division accounted for 1% of FY13 group revenue and does take on external contracts. 8% of EBIT. Within this segment, Crescendo International College is a key contributor.

PICTURE 1: UNIBASE PRODUCTS The college is pencilled to move into a new campus at Desa Cemerlang by May 2013. This new building is estimated to cost RM12mil when fully completed.

Management foresees this new campus to rake in double- digit growth although overall contributions to the group would remain small over the next two to three years. For FY13, Crescendo International College made revenue and pre-tax profits of RM3.2mil and RM0.6mil respectively. (See Pictures 4-5).

VALUATION AND RECOMMENDATION

Source:Crescendo, AmResearch  Quick review of FY13 results

The external works for construction jobs are undertaken Crescendo’s core earnings slipped 9% YoY in FY13 via Repute Construction Sdn Bhd. In FY13, external (turnover: -6% YoY). Apart from a near-term slowdown in billings from construction contracts was worth RM59mil, property activities, the group held back on some RM200mil accounting for 20% of group turnover and 13% of EBIT. worth of completed factory units at NCIP. Higher contributions from the construction division were not a Further down the value chain, Unibase owns and operates strong enough off-setting factor, given its relatively lower three ready-mixed concrete plants with a total capacity of margins. 300 cu m/hour and average utilization rate of ~50%. These plants also manufacture ‘u’ drains, concrete pipes/culverts,  Strong profit rebound in FY14F pipes and other pre-cast concrete products for the export markets. We project FY14F to chart a swift and strong turnaround in earnings (+52% YoY) at RM85mil on a core level. Chief of External sales contributed approximately RM42mil or 71% all is the RM220mil under the Built-Then-Sell (BTS) of the manufacturing segment’s revenue in FY13. As for its industrial units at NCIP that can be immediately sold at exports, the group continues to see Singapore as an very high margins. Unbilled sales value stood at RM100mil important market – accounting for the bulk of some as at 31 January 2013. RM25mil worth of potential contracts that are currently under negotiations.  4-fold jump in FY14F-15F new sales

On the whole, the domestic market contributes 80% of Management is guiding for RM1.2bil in new launches over manufacturing revenue with exports making up the the next two years (1 April 2013 until 31 March 2015). This balance 20%. translates into annual sales of ~RM600mil each for FY14F- 15F. Future opportunities for supply of pre-cast products to Singapore include bleachers for the Singapore sports hub, Based on this, our new sales forecast for FY14F-15F is 4x columns/beams for buildings, segmental rings and jacking higher than FY13’s RM99mil at RM384mil-RM397mil. pipes (See Pictures 1-3). New launches in the pipeline during this period include detached/semi-detached factories (NCIP, TPC), TDC and Bandar Cemerlang.

AmResearch Sdn Bhd 11 Crescendo Corporation 8 May 2013

PICTURE 4: CRESCENDO INTERNATIONAL COLLEGE PICTURE 5: CRESCENDO INTERNATIONAL COLLEGE – NEW CAMPUS

Source:Crescendo, AmResearch Source:Crescendo, AmResearch  Strong capital structure We nevertheless believe the group is unlikely to make any We project Crescendo’s balance sheet to remain at a aggressive moves for new land unless it is strategic and healthy 8% (FY13: 14%) for FY14. Barring any huge located near its existing landbank. We envisage landbanking transactions, Crescendo’s capital raising Crescendo’s existing landbank inventory as sufficient to needs appear to have been front-loaded via the issuance provide visibility over the next 15 years or beyond. of 59.7mil, seven-year ICULS (coupon: 3.75%) together with 59.7mil free warrants back in January 2009, on a 1-  Unique positioning as both an earnings and for-2 renounceable rights issue. dividend play

The ICULS can be converted anytime into new Crescendo Backed by a strong launch pipeline, we project robust shares up until its expiry in January 2016, following which FY14F-16F FD EPS CAGR of 34% on pre-tax margins of conversion is mandatory at RM1.00/share. On the other 34%-38%. This translates into undemanding FD PEs of 6x- hand, the warrants will expire by January 2014 and have 9x. an exercise price of RM1.00/share. On top of them, Crescendo offers attractive dividend yields Theoretically, both the ICULS and warrants offer a slightly of 6%-7% (tax-exempt) – the highest within our property cheaper entry into Crescendo – at an 8% and 5% discount stock universe. We have assumed average payouts of respectively - based on its closing price of RM2.73/share. 30%, in line with the group’s minimum payout policy.

In any case, our EPS and NAV assumptions have already incorporated these dilutive instruments on a fully-diluted basis. DEEP VALUE WAITING TO BE UNLEASHED

As highlighted, Crescendo’s financial strength has At current levels, Crescendo is trading at a steep 57% provided the group to either lock-in building materials or discount viz-a-viz its NAV/share of RM6.36/share, and 0.9x pre-build properties to any swings in input cost. The its BV. RM200mil of completed factory units in its inventories are testament to this. Crescendo is a pure property play in Johor that represents an excellent exposure to reflating land prices in IM (56% of  …and nimble landbank), with a special niche in industrial property development. On the flipside, Crescendo’s unleveraged balance sheet also positions the group for any good landbanking The institutionalisation of its shareholding structure (now: opportunities. <10%) should help prod a greater share price discovery towards its NAV. And not unlike property and plantation behemoths such as the IOI group, we would also not preclude the potential injection of landbank from its sister company, Kim Loong Resources – which owns about ha of palm oil plantations in Johor.

This is possible, as both Kim Loong and Crescendo are majority-owned by the Gooi family – where the respective corporate headquarters of both companies are also located within the same building in JB city centre.

For instance, the Ambok Resorts project is located not far off from Ambok Estate, which is under Kim Loong Plantation Sdn Bhd.

AmResearch Sdn Bhd 12 Crescendo Corporation 8 May 2013

CHART 8: CORPORATE STRUCTURE

Source:Crescendo, AmResearch

CHART 8: OPERATIONAL STRUCTURE

Source:Crescendo, AmResearch

AmResearch Sdn Bhd 13 Crescendo Corporation 8 May 2013

CHART 9: PB BAND CHART CHART 10: PE BAND CHART

1.0 15.3

14.0 0.8 12.7

11.4 +1s 0.6 10.1 Avg )x ) ( (x8.8 7.5 -1s 0.4 6.2

4.9 0.2 3.6

2.3 0.0 M A N F M A N F M A N F M A N F M A N F 1.0 M A N F M A N F M A N F M a u o be a u o be a u o be a u o be a u o be a u o e a u o e a u o e a y g v - y g v - y g v - y g -v - y g v - y g v b y g v b y g v b y 0- 0- 0- 0 0- 0- 0- 1 1- 1- 1- 1 1- 1- 1 1 1- 1- 1- 1 - - - 1- - - 1- 1- - - - 1- - 8 8 8 9 9 9 9 0 0 0 0 1 1 1 1 2 2 2 2 3 01 01 01 1 1 1 1 2 21 21 21 3 31

AmResearch Sdn Bhd 14 Crescendo Corporation 8 May 2013

TABLE 5: FINANCIAL DATA

Income Statement (RMmil, YE 31 Jan) 2012 2013 2014F 2015F 2016F

Revenue 290.4 282.6 310.4 387.9 515.9 EBITDA 86.9 81.8 120.1 147.6 178.3 Depreciation (2.4) (3.0) (3.6) (4.2) (4.6) Operating income (EBIT) 84.5 78.8 116.5 143 173.7 Other income & associates 0.0 0.0 0.0 0.0 0.0 Net interest 0.8 1.5 1.2 2.8 3.6 Exceptional items 2.5 0.0 0.0 0.0 0.0 Pretax profit 87.8 80.3 117.7 146.2 177.3 Taxation (21.8) (20.4) (26.6) (33.1) (38.3) Minorities/pref dividends (2.5) (4.1) (6.5) (3.7) (4.8) Net profit 63.5 55.7 84.7 109.4 134.3 Core net profit 61.0 55.7 84.7 109.4 134.3

Balance Sheet (RMmil, YE 31 Jan) 2012 2013 2014F 2015F 2016F

Fixed assets 45.3 55.2 66.4 72.1 77.3 Intangible assets 0.0 0.0 0.0 0.0 0.0 Other long-term assets 452.2 489.4 493.7 497.6 501.0 Total non-current assets 497.5 544.6 560.1 569.6 578.2 Cash & equivalent 76.0 22.6 54.8 82.2 86.9 Stock 56.0 86.3 84.2 112.6 158.2 Trade debtors 88.5 81.7 85.0 127.5 169.6 Other current assets 66.4 50.7 50.8 51.0 51.3 Total current assets 286.9 241.2 274.9 373.4 466.0 Trade creditors 60.4 55.6 38.3 40.2 42.7 Short-term borrowings 56.2 24.2 38.3 40.2 42.7 Other current liabilities 6.2 5.4 5.4 5.4 5.4 Total current liabilities 122.9 85.2 82.0 85.9 90.9 Long-term borrowings 87.0 82.4 66.9 54.6 44.7 Other long-term liabilities 10.3 3.4 3.4 3.4 3.4 Total long-term liabilities 97.3 85.8 70.4 58.0 48.1 Shareholders’ funds 549.0 595.6 656.9 769.8 871.0 Minority interests 15.2 19.2 25.7 29.4 34.2 BV/share (RM) 2.99 3.05 3.36 3.38 3.82

Cash Flow (RMmil, YE 31 Jan) 2012 2013 2014F 2015F 2016F

Pretax profit 87.8 80.3 117.7 146.2 177.3 Depreciation 35.1 40.2 77.5 51.0 62.1 Net change in working capital (9.9) (28.4) (18.5) (69.0) (85.1) Others (31.8) (19.1) (26.6) (33.1) (38.3) Cash flow from operations 48.5 35.7 76.3 48.2 58.5 Capital expenditure (5.6) (32.6) (15.0) (10.0) (10.0) Net investments & sale of fixed assets 0.2 0.3 0.0 0.0 0.0 Others 2.3 (0.1) 0.0 0.0 0.0 Cash flow from investing (3.1) (32.5) (15.0) (10.0) (10.0) Debt raised/(repaid) (3.2) (34.3) (1.3) (10.4) (7.4) Equity raised/(repaid) 8.7 5.8 0.0 32.6 0.0 Dividends paid (17.2) (15.4) (23.5) (29.0) (33.1) Others (7.2) (12.8) (4.3) (3.9) (3.4) Cash flow from financing (18.8) (56.7) (29.0) (10.8) (43.8) Net cash flow 28.8 (51.5) 34.7 42.3 11.5 Net cash/(debt) b/f 49.3 75.8 22.3 57.1 99.4 Net cash/(debt) c/f 78.0 24.4 57.1 99.4 110.9

Key Ratios (YE 31 Jan) 2012 2013 2014F 2015F 2016F

Revenue growth (%) 34.9 n/a 9.8 25.0 33.0 EBITDA growth (%) 86.0 n/a 46.8 22.9 20.8 Pretax margins (%) 30.2 28.4 37.9 37.7 34.4 Net profit margins (%) 21.9 19.7 27.3 28.2 26.0 Interest cover (x) 106.7 98.7 167.3 218.0 289.5 Effective tax rate (%) 24.8 25.4 22.6 22.6 21.6 Net dividend payout (%) 32.5 38.6 30.0 30.2 29.7 Debtors turnover (days) 92 110 98 100 105 Stock turnover (days) 72 92 100 93 96 Creditors turnover (days) 64 75 55 37 29

Source: Crescendo, AmResearch

AmResearch Sdn Bhd 15 Crescendo Corporation 8 May 2013

Anchor point for disclaimer text box

Published by The information and opinions in this report were prepared by AmResearch Sdn Bhd. The investments discussed or recommended in this AmResearch Sdn Bhd (335015-P) report may not be suitable for all investors. This report has been prepared for information purposes only and is not an offer to sell or a (A member of the AmInvestment Bank Group) solicitation to buy any securities. The directors and employees of AmResearch Sdn Bhd may from time to time have a position in or with 15th Floor Bangunan AmBank Group the securities mentioned herein. Members of the AmInvestment Group and their affiliates may provide services to any company and 55 Jalan Raja Chulan affiliates of such companies whose securities are mentioned herein. The information herein was obtained or derived from sources that 50200 Kuala Lumpur we believe are reliable, but while all reasonable care has been taken to ensure that stated facts are accurate and opinions fair and Tel: (03)2070-2444 (research) reasonable, we do not represent that it is accurate or complete and it should not be relied upon as such. No liability can be accepted for Fax: (03)2078-3162 any loss that may arise from the use of this report. All opinions and estimates included in this report constitute our judgement as of this date and are subject to change without notice. Printed by For AmResearch Sdn Bhd AmResearch Sdn Bhd (335015-P) (A member of the AmInvestment Bank Group) 15th Floor Bangunan AmBank Group 55 Jalan Raja Chulan 50200 Kuala Lumpur Tel: (03)2070-2444 (research) Fax: (03)2078-3162 Benny Chew Managing Director

AmResearch Sdn Bhd 16