As we approach the end of 2023, a wave of good news is buoying the stock market.
Johor is rapidly becoming a major hub for data centers in Malaysia, offering a viable alternative for Southeast Asia. This surge in interest is driven by several factors:
• Capacity Constraints in Singapore: Overflowing demand due to limited space has companies seeking alternative locations.
• Favourable Conditions in Johor: Close proximity to Singapore, supportive local authorities, and lower land and power costs make Johor highly attractive.
• Land Cost Advantage: Johor offers significantly cheaper land compared to Cyberjaya
Nusajaya Tech Park, Sedenak Tech Park, YTL Green Data Centre Park, and Nusa Cemerlang Industrial Park are poised to become major data center hotspots in Johor.
Access to reliable land, facilities, and power is key to a successful computing infrastructure, as Nvdia CEO Jensen Huang emphasises.
Case Study: Crescendo Corporation Berhad (CRESCENDO)
This low-profile Johor-based property developer is positioned to benefit significantly from the data center boom. Last month, within a span of 10 days, CRESCENDO announced three proposed land disposals to data center players (including Microsoft), totaling RM543.19m - nearly its entire market capitalisation. This translates to a potential gain of RM310.26m.
7 Nov 2023: Proposed disposal of 975,173 sqft of land to STT Singapore-based data centre operator STT GDC Malaysia 2 Sdn Bhd for RM117.02m
15 Nov 2023: Proposed disposal of 887,984 sqft of land to Yu Ao Sdn Bhd for RM111m
17 Nov 2023: Proposed disposal of 2.62m sqft to Microsoft for RM315.7m
After selling approximately 100 acres of lands, CRESCENDO still has about 100 acres of land in Nusa Cemerlang Industrial Park. Based on market value of RM120 psf, the 202 acres of land in Nusa Cemerland Industrial Park alone carries a gross value of more than RM1b, about double of CRESCENDO’s current market cap.
Based on its current market cap of RM555m and a net debt position of RM216.691m, its enterprise value stands at RM771.691m. In other words, if the group divests its 202 acres of lands in Nusa Cemerlang Industry Park, it would essentially be giving the remaining 2,385 acres of landbank and properties for free. Of the 2,385 acres of lands, about two-thirds of them are located within 20km of Johor Bahru.
Crescendo’s 2023 annual report shows that the company owned 20 properties in Johor, including industrial plots, factory buildings, vacant land parcels and an oil palm estate approved for residential and commercial development. These properties, which are mostly on freehold land, were acquired in the 1990s and early 2000s. (The Edge https://theedgemalaysia.com/node/690525)
The 20 properties listed in the latest annual report carry a total book value in excess of RM1.1b.
Major landbanks like Bandar Cemerlang (1269 acres), with majority of them are oil palm estates currently, haven't been revalued since 2001, resulting in an undervalued book value of RM5.23 psf. More than 500 acres of lands in Bandar Cemerlang are intended for industrial development.
Similarly, the 216-acre water-fronting lands at Tanjung Senibong, with a carrying value of RM18.57 psf, has not been revalued since 2006.
Meanwhile, its 794 acres of unconverted lands at Ambok Resorts, located within a 20 minutes’ drive from RAPID Pengerang and have not been revalued since 2005, carry a book value of only RM1.30 psf.
Other factors that could bode well for land value within the Iskandar Malaysia region include:
i) The revolutionary Johor Bahru-Singapore Rapid Transit System
The Johor Bahru and Singapore sections of the RTS Link are expected to be physically connected on 11 January 2024.
ii) Potential revival of KL-Singapore High Speed Rail
iii) High rents in Singapore
It costs RM5,000 a month to rent a room in Singapore, while the entire condo unit across the strait can be rented for RM2,000 a month. (https://www.youtube.com/watch?v=zRtoXiHbLsM)
iv) The Gemas-JB electrified double track, which is expected to be completed by 2025, will connect Johor Bahru to Kuala Lumpur and all the way to Padang Besar in northern Malaysia.
Recurring incomes
While its core property development business is cyclical, CRESCENDO’s recurring income streams from property investment and education businesses provide earnings stability. There are 14 units of factories with GDV of RM279m that are currently fully tenanted and expected to generate approximately RM14m of annual rental income. The property investment, management services, investment holding, providing education services and cultivation of oil palm contributed about 23% and 28% of the group’s operating profit in FY22 and FY23 respectively.
Dividend
Except for FY20, during the Covid-19 pandemic, the company has consistently paid out at least 50% of its earnings as dividend in recent years.
Valuation
Calculating the precise RNAV is challenging due to outdated land valuations. As majority of the lands have not been revalued for years, and if we assume a net gain of RM600m from the remaining 202 acres of industrial land in Nusa Cemerlang Industrial Park and a RM1b revaluation surplus for its remaining landbank and properties, this will bump up its net asset per share to RM9, versus its current share price of below RM2 per share.
The market typically applies a discount on RNAV of property stocks, which could range from 50% to 80%, depending on management quality, dividend yield, earnings and growth potential.
During the Iskandar Malaysia rush 10 years ago, Crescendo's share price surged to RM3.80. I believe we have even more real and sustainable catalysts now to support further appreciation of land prices in Iskandar Malaysia, including the RTS and data centers.
Johor is a rising star in the data center landscape, and CRESCENDO is well-positioned to capitalise on this growth. Coupled with the company's undervalued landholdings, partial recurring incomes, and decent dividend history, do these factors make CRESCENDO an attractive stock for investors seeking exposure to growing data center industry in Johor and RTS Link, the potential game-changer for property market in Johor Bahru?
