CRESCENDO (CCDO.MK, CREC.KL) 8 May 2013 Attractive proxy to the ascendancy of industrial property in Iskandar Malaysia 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. Johor-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 Tebrau 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 <RM200mil nI d e ) x in FY13 to at least RM500m in FY14F and RM700m in M P R 2.00 1,413 o ( ni FY15F, consistent with management presales target of st RM1.2bil over the next two years. This is supported by high pre-tax margins of ~40% for its industrial properties. 1.00 1,187 • Balance sheet is strong with FY14F net gearing of just 8%. 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 : Kota Tinggi 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). Iskandar Malaysia (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 Desaru 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.