News    Crescendo Corporation Berhad (“Crescendo”) had entered into an agreement to form a JV company, Medini Capital S/B, with Mavern Pte Ltd (“MPL”) and Meiban Resources S/B (“MRSB”) based on a 51.0%, 32.7% and 16.3% controlling stakes basis. Crescendo will be selling 8.1ac of its Nusa Cemerlang Industrial Park (“NCIP”) land to the JV company and in return be entitled to 51% share of development profits.  The  JV company also has an option to acquire another 7.8ac in NCIP. 

MPL is a developer in Singapore, better known for its M38@Jln Pemimpin development. We are unclear about MRSB’s background but believe they do have property development experience. 

Comments    Rationale for the JV is to tap into high-rise residential development expertise from Singapore which Crescendo lacks due to its background mainly in mass-housing and industrial property. It also means that MPL can tap into its client base, creating synergy, which bodes well for the potential property sale. 

The JV Co will be developing a high-rise residential component and we estimate that the project’s GDV will be RM635m (refer overleaf for assumptions). Land sale gains are unknown for now, but it should be significant given the low land cost of NCIP vs. today’s price.

Although management has earlier guided that it will convert part of its NCIP land into mixed development, we are positively surprised by the JV and are excited on the tie-ups with Singaporean parties, which may help strengthen Crescendo’s earnings profile and branding. 

Outlook   More interestingly, the JV project implies RM78m/ac extraction rate, which is much higher than the implied RM3.6m/ac derived from the remaining portion of NCIP (guided GDV of RM1.0b over 278ac). Clearly this lends upside support to NCIP’s RNAV; we will be seeking more details from management soon. Every RM100m hike in GDV will improve our FD RNAV by 5.0 sen/share. 

Forecast   We are unclear if the deal will be concluded this year or next and will be seeking for a company update soon. In terms of development profits, significant contributions will likely be felt from FY31Jan16 onwards. For now, we maintain our earnings estimates, pending clarity from management.

Rating    Maintain OUTPERFORM

Valuation   Maintain TP of RM3.56 based on 30% discount to its FD RNAV of RM5.08.  We believe there are more upsides to RNAV from these new developments and we may raise our TP post a company visit. We continue to like Johor/Iskandar plays and Crescendo’s unique position there as an industrial and mass housing developer is enhanced with these Singaporean tie-ups.

Risks   Sector policy risks, which may cause knee-jerk reactions amongst investors causing share price volatility.

Source: Kenanga