Crest Builder Holdings - OUTPERFORM - 11 JUNE 2012

 We initiate coverage on Crest Builder Holdings (CBH) with an OUTPERFORM call and a TP of RM1.49, which provides a total return of 48%. The TP valuation is at a 10% discount to our FD SoP of RM1.67, inclusive of 55% discount on property. CBH is at its inflection point, with rerating catalysts as it moves from its traditional construction business into the property development scene via its Prasarana-awarded redevelopment project of the Dang Wangi LRT station worth a  GDV RM1.0b. This is the first major award from Prasarana’s ‘rail-plus-property’ projects involving a total 40-50 available  MRT/LRT station sites. We like CBH for its ability to secure such a catalytic project and expect more to come, which will ultimately propel the company to greater heights as it rides on the ETP play. We expect a 3-year (up to FY14E) CAGR in earnings of 31%. 

Inflection point. CBH is becoming a strong contender for upcoming government’s property projects like MRT and LRT’s “rail-plus-property” projects like Dang Wangi. Given the highly competitive landscape, we reckon CBH is moving in the right direction towards other better margin businesses like property, recurring earnings via investment properties (Tierra Crest and The Crest) and its UniTapah BOT concession income (23-year concession at 16% IRR).

Dang  Wangi  GDV  of  RM1.0b  puts  CBH  on  the  map.  CBH and Detik Utuh S/B (likely a 51:49 JV) has entered into a JV agreement with Prasarana to develop the Dang Wangi LRT station  into a mixed development project, which is an amazing feat as the JV was competing with the ‘big boys’. The land repayment terms are favourable given its progressive and ‘payment-inkind’ method, which eases cash flow constrains. Furthermore, CBH can earn two-prong revenues as it will likely be the preferred contractor. We expect the Dang Wangi project to do well (priced between RM1050-1250psf) as full project completion will meet the timing of the Sungai Buloh-Kajang MRT line and the fact that the development is on top of the LRT station. We believe the pricing above is fair as the target launch is only in 2H13. Upon finalising its financing structure, we expect the group to lock in more ‘rail-plusproperty’ projects. In the meantime, the group’s property development earnings will be driven by its Batu Tiga projects (total remaining GDV of RM502m), which should do well given the affordable housing segment. 

Estimating FY12, 13 and 14E core earnings of RM17.1m, RM19.8m and RM35.0m respectively, driven by 1) FY12-13E construction order book replenishment of RM250m-RM300m; 2) FY12-14E property sales of RM150m-RM327m; 3) recurring income from UniTapah (FY14 commencement) and investment properties (further details in report). The risks to our estimates are weak property demand, construction order book replenishments, negative regulations and project financing issues. 

Initiate coverage on CBH with an OUTPERFORM call and a TP of RM1.49, which provides a total return of 48%.  We reckon our valuations are extremely conservative given our multiple layers of discount and fair valuation benchmarking. Our TP is based on a 10% holding company discount to our FD SoP of RM1.67. Applied WACC is 10% for the DCF of its future profits from property and UniTapah BOT concession. Construction is valued at 7x FY12E PER while investment properties are valued at 1.0x FY12E PBV. The Property segment is based on a 55% discount (max under our coverage) to our DCF-driven RNAV for the Property Development division. Upon further clarity on financing structure, we may narrow our property RNAV discount to 30%-40%, which implies a potential blue-sky TP of RM1.68 – RM1.79.

Source: Kenanga