This article first appeared in The Edge Malaysia Weekly, on October 26 - November 1, 2015.

As the saying goes, the darkest hour is just before the dawn.

Likewise, Crescendo Corp Bhd’s net profit plunged 80% to RM12.89 million in first half ended July 31, 2015 (1HFY2016), from a year ago. And its unbilled sales have tumbled to a five-year low of barely RM40 million as at Sept 30, 2015.

Year to date, its share price has slipped 12%.

That said, chairman and managing director Gooi Seong Lim warns that things could get worse before they get better. He is hopeful that the weak ringgit will benefit Crescendo as more Singaporeans cross the causeway to buy properties and set up manufacturing facilities in Johor.

“Our [financial performance in] the second half will be weaker than the first. FY2016 [ending Jan 31, 2016] will also be weaker than the last financial year,” Gooi tells The Edge in an interview over the phone.

Crescendo’s net profit for FY2016 will be substantially lower than the RM119.69 million it achieved in FY2015.

In a Sept 30 report, Kenanga Research analysts Sarah Lim and Adrian Ng say Crescendo’s core net profit of RM12.8 million in 1HFY2016 “came in disappointingly”, as it makes up only 28% of their full-year estimate of RM44.5 million. Although a single-tier dividend of two sen was declared, it was way below Kenanga Research’s full-year expectations of 7.8 sen.

Gooi attributes the big drop in Crescendo’s earnings to the slower-than-expected billing progress from its property development as well as delays in new launches.

“There are a lot of approvals that need to be obtained from the authorities, from layout plans, housing plans and building plans to layout changes. It’s a very tedious procedure,” he says.

Unlike some property developers, Crescendo does not have a large amount of unbilled sales that could provide a buffer during the current slowdown. Its unbilled sales of RM40 million (as at Sept 30, 2015) will be fully realised by year end. In other words, this can only provide the group with another few months of earnings visibility.

However, Gooi remains upbeat that Crescendo will recover in FY2017 as it expects more industrial property sales to come in. The developer also retains some of its industrial properties for rental income.

Crescendo owns a large landbank of 2,921 acres in Johor, of which 54.8% is in Iskandar Malaysia. About two thirds of its gross development value (GDV) is from industrial properties, whose demand is relatively stronger.

“Within the next two months, we will be launching a new medium-sized industrial property project in Taman Perindustrian Cemerlang and this should contribute positively to our group’s results in FY2017,” Gooi says.

The new project, which will have an estimated GDV of RM85 million, will be developed on 60 to 70 acres in one of the largest industrial parks in Johor.

Once fully developed, the 600-acre Taman Perindustrian Cemerlang will comprise more than 900 industrial buildings and warehouses.

According to Gooi, the industrial park’s prime location and proximity to Singapore have made it a favourite choice among companies. More than 50% of its customers are Singaporeans.

“The advantage for Singaporeans is the weaker ringgit, as they can now own freehold properties in Malaysia for the long term, instead of leasehold [properties in Singapore]. So, certain industrial parks in Johor may be ideal for factory relocation,” he says.

Crescendo also has an 800-acre residential project and a 500-acre industrial project in the pipeline at Bandar Cemerlang Park. They are expected to be launched within two years.

“We are targeting Malaysians working in Singapore who are looking for affordable homes. We will be launching cluster semi-detached houses worth RM230 million and affordable homes worth RM130 million,” says Gooi.

At the closing price of RM2.02 last Thursday, Crescendo (fundamental: 2.70; valuation: 3) was trading at a rolling 12-month price-earnings ratio of 3.7 times and 45% discount to its book value.

However, Kenanga Research does not view Crescendo’s reliance on industrial property sales positively. It downgraded the stock to “underperform” and lowered its target price to RM1.90 from RM2.46 previously.

It is worth noting that Crescendo has a low gearing ratio of 0.29 times, giving it more breathing space than other developers that have heavy interest expense burdens.

Gooi highlights that while the company’s assets value remains strong, its share price is undervalued. “Our share price is way below our net tangible assets. I would say there is still upside to our price-to-book value and even the market value of our assets.”

Crescendo was InsiderAsia’s stock of the day in mid-June, as it is deemed a comparatively safe option given the company’s low gearing as well as its focus on the more resilient industrial and affordable landed properties.

“In particular, we like the company’s higher-than-market average yields. We believe the payout of 23% of net profit, which included revaluation gains, is sustainable going forward,” the research team said.

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