Crest Builder in transformation phase

Crest Builder Holdings Bhd (June 7, RM1.03)
Not rated: The recent award of the redevelopment of the Dang Wangi LRT station and potentially the Malaysian Rubber Board (MRB) land opposite the Great Eastern Mall in Kuala Lumpur's city centre are the primary reasons we visited the company last week.

Crest has been known as a construction company. It undertakes various property development jobs from the private sector and some infrastructure, utilities complexes and educational institutions from the public sector. Today, its unbilled construction order book stands at RM499 million, of which 26% comes from government-related projects and the remainder from the private sector and in-house jobs.

As construction jobs get more competitive, the company sees more opportunities by expanding its exposure to the property development segment. The redevelopment of the government land parcel and LRT station is the first step. It was also reported recently that the company is close to securing the MRB's land development in Jalan Ampang.

Both projects could give a gross development value (GDV) of more than RM2 billion. The company is not new to developing high-rise quality properties. It was the contractor for many well-known buildings such as Menara Worldwide, Menara Binjai, The Residence TTDI, Twins Damansara, Verticas Residency@Bukit Ceylon. Therefore, we believe it has its strength in property development, but may lack a track record in marketing high-end products.

Given the estimated proceeds of only RM12 million to RM13 million and current net gearing of 0.85 times, we believe Crest will have more equity fundraising exercises coming through. This is expected to have a dilution impact on earnings, and to some extent valuations.

Key risks include stock illiquidity and global macroeconomic risk.

We estimate earnings growth of 34% for FY12 and 8% for FY13, mainly underpinned by the existing property and construction projects. Earnings from the Dang Wangi project will kick in from FY14 onwards.

We value Crest at RM1.18, based on a 25% discount to sum-of-parts value. Our valuations have also factored in the enlarged share base from the 10% placement exercise. — RHB Research Institute, June 7

This story appeared in The Edge Financial Daily on June 8, 2012.