TA Initiate Coverage on Crescendo with TP of RM1.87

Crescendo’s FY11 net profit came in above our expectations by 15%. The variance was largely due to the lower-than-expected tax rate. At PBT level, Crescendo’s FY11 earnings were within our forecasts. For this quarter, Crescendo has declared a final gross dividend of 5sen, bringing the total YTD gross dividend to 11sen. This was higher than our projections of 10sen and the previous year dividend payment of 7sen.

YoY, Crescendo’s FY11 net profit grew by >100% driven by: 1) 34% increase in revenue; and 2) improvement in PBT margin 7.5%pts. On the quarter-on-quarter basis, Crescendo’s 4QFY11 earning was boosted by higher top-line growth, coupled with the expansion in margins and lower effective tax rate.
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We value Crescendo at 9x CY11 EPS, which is at a discount to our sector PE of 12x for the small cap property company. This discount is to factor in the concentrated risks in relation to its sole exposures to property development in Johor.

We arrive at a target price of RM1.87/share. Given the potential upside of 33%, we re-initiate coverage on Crescendo with a Buy recommendation.

For full report, you can get it free from Bursa CBRS website at http://eresearch.bursamalaysia.com/download.aspx?id=12261&type=research

Crescendo FY11 Result Comment

This is the report from Business Times:

Crescendo Corp, a Malaysian property developer, rose the most in three months in Kuala Lumpur trading after saying fourth-quarter earnings more than trebled to RM14.3 million.


The stock climbed 3.6 per cent to RM1.46 at 9:07 a.m. local time, set for its biggest gain since Jan. 3. -- Bloomberg



Additional information:
1) Crescendo earnings for FY11 jumped 286% to RM14.3m or EPS of 8.4 sen per share.
2) Dividend announced = 5 sen for 4Q, making full year dividend at 11 sen (vs 7 sen in FY10). This translates into an attractive 7.4% dividend yield based on price of RM1.48...
3) This stock is a laggard among Iskandar stocks, reasons = low liquidity + lack of promotion from stockbrokers. But fundamentally a strong company with long history.

Quoting from the Company's Bursa announcement:

The Group has performed well for the financial year ended 31 January 2011. The revenue increased by 34% to RM215.2 million and the profit before taxation ("PBT") increased substantially by 95% to RM50.9 million as compared to the last financial year.

The higher revenue is mainly contributed from higher sales in construction services and industrial properties. The increase in PBT is contributed by higher sales as well as improved margin especially from industrial properties and construction operation.

CRESNDO dividend going ex tomorrow

Just a short message here to inform that CRESNDO's 2nd interim dividend of 2 sen will go ex tomorrow. This means that today will be the last day in which you are still entitled to the dividend.

However, after the ex, the share price will reflect the 2 sen dividend paid out.

CRESNDO: 5 reasons NOT TO MISS THIS STOCK

Stock Code: 6718
Potential can go up to RM2.12
Upside potential: 47.2%

I have written about Crescendo or CRESNDO on 10-Dec-2010, the full link: CRESNDO Introduction.

To recap, CRESNDO. To recap, CRESNDO is mainly involved in property development and construction related activities in Johor. CRESNDO is a pure proxy to Iskandar investment theme as the Company owns a total of 3,055 acres of land in Johor, out of which 1,735 acres of it is within the boundary of Iskandar Malaysia (as of 31-July-2010).

As usual, let's do some KISS (Keep It Short and Simple) and look at the 5 reasons not to miss this stock.


No 1. Stellar 3Q2011 result with net income up 107% y-o-y
On 29-Dec-2010, CRESNDO announced its 3Q2011 result in which net income surged 107% y-o-y to RM8.45m. However, the net income drop 7.3% q-o-q. Looking from 9-months year to date or 9MYTD perspective, net income surged 56% to RM22.38m


No 2. Consistently paid dividend of 7 sen in the past 5 years, this year dividend likely to be higher
Along with the result announcement, CRESNDO announced dividend of 2 sen per share. This is a surprise as the Company did not do so in last year. Looking at the trend in which 6 sen dividend already announced for this year, final dividend of 3 sen is likely, bringing total dividend to be 9 sen. This translates into 6.25% dividend yield based on yesterday close price of RM1.44... this is easily the highest dividend yield counter among the property stocks.


No 3. From technical point of view, price have returned to NEUTRAL level
After the good 3Q2011 result, the market has noticed CRESNDO and push the stocks to OVERBOUGHT level, causing CRESNDO to move up to as high as RM1.48 on 4-Jan-2011. With the share price retreated slightly to RM1.44 yesterday, the stock RSI has returned to 67.7, indicating it has returned to NEUTRAL level. How to play with this? Use this as a chance to accumulate this stock with deep value.


No 4. Attractive value with Price to NTA ratio of 0.48x
Considering that: i) CRESNDO has the potential of growth due to its exposure to Iskandar investment theme, ii) 3Q2011 net profit jumped 107% y-o-y and iii) consistenly paid dividend in the last 5 years with 7 sen dividend each year... the market may have given too much discount to CRESNDO with only 0.48x Price to NTA or P/NTA. 
 
No 5. Have potential to increase 47.2% to RM2.12
KSL is the nearest comparison for CRESNDO with P/NTA is 0.93x based on yesterday close price of RM1.94 and NTA of RM2.08. However, KSL has land or projects in KL while CRESNDO do not. By taking this into consideration, 25% discount to KSL's P/NTA will give fair P/NTA of 0.7x. If the market agree to 0.7x P/NTA for CRESNDO, then this stock is poised to go all the way to RM2.12, representing possible upside of 47.2%.

Today's outlook 21-Dec-2010

Overnight, US market ended flat with DJIA down 13.78p to 11478.13p while S&P gained 3.17p to 1247.08p.

Here are some of the news that may have affected US market:
i) American Express fell 3.4% as new rules by Fed Reserve could limit merchant fees of the Company.
ii) Increase in Amazon.com after analysts upgraded their estimates and ratings.
iii) Rebound in oil price provide support for energy stocks
My view:
Only the rebound of oil price news is something that I think could affect Malaysia market. Oil and gas counters are expected to continue to be in the limelight. From historical PER viewpoint, KNM seems to be the most attractive O&G stock. Also, I believe that North Korea is unlikely to attack South Korea. Overall, today should be slightly bullish for KLCI as investors are likely to return to search for better yields and growth in the equity market.
 
Stocks that I STILL find attractive:

1. CRESNDO (Pure proxy to Iskandar investment theme, paid 7 sen dividend in the past 5 Financial Years, undemanding Price/NTA of 0.47x only, got potential to go up to RM2.55)
2. AXIATA (Growth to come from Indonesia market, with stability in Malaysia Celcom, maiden dividend payout in 2011 should be a major rerating catalyst for this stock, average consensus Target Price RM5.28)
3. HSL (Proxy to Sarawak election theme play, strong balance sheet with net cash position, upside potential will be the announcement of any future projects won, average consensus Target Price RM2.17)

How do I see the market today? 14-Dec-2010

Overnight, US market ended flat with DJIA up 18.24p to 11428.56p while S&P gained 0.06p to 1240.46p.

According to Reuters, "The Nasdaq closed lower to end eight straight days of gains on Monday as some large-cap tech stocks slid in a late-day sell-off. The Dow cut its gains and the S&P 500 ended a thinly traded session flat as optimism faded over China's move to tame its growth, and as some technical indicators suggested a near-term pullback could be in the cards". Put it simply, at first investors are excited on China decision to maintain interest rate, but later feels it is better to take profit or sell first.


My view:
China proved to the world once again that its decision is hard to predict as it maintained interest rate despite inflation surge to 5.1%. This is a good news but the effect should already been priced in. Keep watching for the oil price though, as the market may get worry again when it surpassed US$90 and US$95 level. (Currently at US$88.44). Overall, I think today should be slightly bearish for KLCI on the lack of catalysts seen.

Stocks that I STILL find attractive:

1. CRESNDO (Pure proxy to Iskandar investment theme, paid 7 sen dividend in the past 5 Financial Years, undemanding Price/NTA of 0.43x only, got potential to go up to RM2.55)
2. FPI (Trade at attractive historical PER of only 5.85x, strong balance sheet with net cash of RM81.42m or 33.14 sen per share, got potential to go up to RM1.39)

Stocks that I temporary no longer find attractive:

1. SAPIND (14 Sen dividend already gone ex today, short term potential has been realized with the share closed at RM1.33 - exactly same as my earlier estimate)

How do I see the market today? 13-Dec-2010

Last Friday, US market ended slightly higher with DJIA up 40.26p to 11410.32p while S&P gained 7.40p to 1240.40p.

What happened during the weekend?

1. China inflation at 5.1%, exceeds expectation
China’s risks a more abrupt tightening in monetary policy next year after refraining from raising interest rates since October even as inflation accelerated to the fastest pace in more than two years. Consumer prices jumped 5.1 percent in November, a statistics bureau report showed Dec. 11. A measure of wholesale costs climbed 6.1 percent, exceeding all 28 estimates in a Bloomberg News survey of economists. (Source: Bloomberg) Click here to read full report


2. EU leaders to agree on law change for euro stability
European Union leaders will agree next week to insert two sentences into the EU treaty to pave the way for the creation of the European Stability Mechanism from 2013, draft conclusions of the summit showed. (Source: Reuters) Click here for full report

My view:

Greater than expected inflation in China will likely caused the Chinese Government to be more aggressive in implementing interest rate increase or lending restrictions. This is bad for the stock market. The EU development should decrease the worry among investors on Europe but the positive impact should be minimal to the market. Overall, I think today should be slightly bearish for KLCI.

Stocks that I STILL find attractive:

1. CRESNDO (Pure proxy to Iskandar investment theme, paid 7 sen dividend in the past 5 Financial Years, undemanding Price/NTA of 0.45x only, got potential to go up to RM2.55)
2. DRBHCOM (HwangDBS initiates coverage on this stock with Target Price of RM3.55, historical PER of 7.37x now means it is still trading at huge discount compared to other conglomerates in Malaysia, got potential to go up to RM3.00)
3. FPI (Trade at attractive historical PER of only 5.85x, strong balance sheet with net cash of RM81.42m or 33.14 sen per share, got potential to go up to RM1.39)

Crescendo Corporation Berhad

Key Points:
1. Price at RM1.33 as of 9-Dec-2010 close. Undemanding Price To NTA of 0.45x only.
2. Paid 7 sen dividend consistently in the past 5 Financial Years. Historical Div Yield of 5.26%.
3. Pure proxy to Iskandar investment theme with 3,055 acres of land in Johor.
4. Laggards among Iskandar related stocks (UEMLAND moved long time ago, KSL moved since Monday, CRESNDO still has not moved).
5. Potential to increase to RM2.55 (if market value it at same P/NTA same as KSL)

Company Background

Established in 1989, Crescendo Corporation Bhd (CRESNDO) is mainly involved in property development and construction related activities in Johor. CRESNDO gained its listing status on Main Board of KLSE on 8-Apr-2010. Apart from property and construction division, CRESNDO also generates revenue from education and property investment and management services.

Over the past 11 years, CRESNDO has established a niche in industrial property development. Its flagship industrial park is known as Taman Perindustrian Cemerlang (TPC) and currently has more than 700 established factories operating in it. TPC is located near Johor Bahru and is one of the largest private industrial estates in Johor.
 
Click here for the Group Structure Link to CRESNDO Group Structure

CRESNDO is a pure proxy to Iskandar investment theme as the Company owns a total of 3,055 acres of land in Johor, out of which 1,735 acres of it is within the boundary of Iskandar Malaysia (as of 31-July-2010). The Group specializes in the development of industrial properties (which has higher margins vs commercial and residential property), with 724 units of them (valued at RM597.1m) completed and sold so far. For residential and commercial development properties, 4,316 units of them (valued at RM455.2m) completed and sold so far.

Currently, CRESNDO’s main ongoing project is Nusa Cemerlang Industrial Park (NCIP), which consists of 353 units of factories on 527 acres of gross industrial development land. To date, 157 units of detached and semi-detached factories with Gross Development Value (GDV) of RM465m have been launched. Out of this, 101 units of factories with GDV of RM273m have been sold.

In addition, the Company’s other ongoing projects include Bandar Cemerlang, Taman Perindustrian Cemerlang, Desa Cemerlang and Taman Dato’ Chellam.

Management

Since listed on 8-Apr-1997, the Gooi family remained as the main owners of the Company with 66.29% ownership as of 15 June 2010 and continued to be the main driver of the Company.

The Board is still dominated by members of the Gooi family supported by independent directors who are professional. The management team is experienced with its Chairman and Managing Director Mr Gooi Seong Lim has been with the Company for 35 years.

Financials

CRESNDO registered 1H2011 revenue of RM99.4m, representing 25.6% growth as compared to 1H2010. The significantly higher revenue is attributed to higher sales in construction services and concrete products. EBIT is higher due to higher margin from industrial properties as well as construction operations.

CRESNDO’s balance sheet is relatively healthy with: i) current ratio increased to 3.0x in 1H2011 from 2.4x as of end FY2010 and ii) quick ratio increased to 2.2x in 1H2011 from 1.5x as of end FY2010.

CRESNDO has paid 7 sen dividend consecutively in the past 5 financial years, comprising 3 sen interim dividend and 4 sen final dividend. On 28-Sep-2010, CRESNDO has announced higher interim dividend of 4 sen per share, which is higher than its historical interim dividend of 3 sen. It is also worth to note that the ex-date of the 4 sen dividend has not been announced.

Assuming that last year final dividend of 4 sen is maintained, then total dividend for FY2011 will be 8 sen. This translates into attractive dividend yield of 6.0%, which is significantly higher than many other property stocks.

Valuation by Price To Net Tangible Asset comparison

One of the best way to value Property stocks is by using Price to Book Value ratio or PBR (provided there is none or small Intangible Asset in the Company). Besides CRESNDO, there are 2 companies with huge lands in Johor i.e. UEMLAND and KSL.

As of 9-Dec closing price:
UEMLAND: Share price RM2.58, NTA per share: 68.92 sen, P/NTA: 3.74x
KSL: Share price RM1.78, NTA per share: RM2.08, P/NTA: 0.86x

One would argue that CRESNDO should be valued at the same P/NTA with KSL. Both are property developers in Johor. From dividend perspective, for last financial year, CRESNDO paid 7 sen dividend while KSL paid 5 sen.

KSL share price has increased quite substantially from RM1.56 on 6-Dec to RM1.78 as of 9-Dec. The reasons may be due to increasing awareness from investors on laggards among Iskandar related stocks. If you have missed out on KSL share increase, CRESNDO is the one you should be looking at.

Assuming same P/NTA of 0.86x (same as KSL), CRESNDO has the potential to go up to RM2.55.