OSK's commentary on CrestBuilder

Crest Builder reported its earnings last night. And if one looks at Crest Builder's most recent quarterly performance, it does look mighty impressive.

The following is a screenshot from Star website.



However, if one reads the earnings notes, one would realized that this superb performance was aided by revaluation of a property gain of 38.5 million.

• At the same time, during the financial period, a gain arising from changes in the fair value of investment properties amounting to RM38.5 million was recognised in the income statement. Fair value is arrived by reference to market evidence of transaction prices for similar properties and is performed by registered independent valuers having appropriate recognised professional qualification and recent experience in the location and category of the properties being valued.

Now if you strip out this gain from the earnings, Crest Builder's earnings would only be around 6.3 million only. Which is a far cry from the gain of 12 million it made the previous quarter. Isn't this a huge question mark on Crest Builder's q-q performance?

Today, I received two copies of report on this stock, one from KN and one from OSK.

KN recognized the issue with Crest Builder's q-q weakness and stated the following.

• QoQ, revenue and EBITDA fell 12.1% and 39.6% respectively, mainly due to slower recognition of revenue for new construction projects and lower contribution from 3 2 Square as the property was fully completed in 3Q07. 4Q pre-tax however soared 209.6% to RM46.9m, spurred by the exceptional gain as aforementioned.

Now OSK on the other hand, decided not to mention this issue instead. I mean, surely a simple word or two explaining the q-q weakness would be only be right, yes?


OSK wrote the following.

• Do Not Underestimate the Little One
  FY07 earnings displayed a 70.4% growth on back of a 14% rise in revenue. We do not expect its recent orderbook replenishment rate to slow down as it is still eyeing for projects under the 9MP. In our view, CBH’s share price has yet to reflect its recent performance and future prospects. Current cheap valuations should provide a good level to accumulate the stock. Maintain BUY with a TP of RM2.02.
  
  Nice growth. CBH recorded a net profit of RM72.6m (+263% y-o-y). However, included in this amount was a gain on revaluation of its investment properties (RM38.5m). Stripping off this revaluation gain, FY07 earnings still grew by an impressive 70.4%. This is on back of a 14% revenue growth. Relative to our forecast of RM33.1m, core earnings were within expectations, coming in at RM34.1m.
  
  Property boosting margins. The core earnings growth was driven by (i) lower effective tax rate (27% FY07 vis-à-vis 36% FY06) and (ii) margin expansion. Better contributions from the property division were the main source behind this margin expansion. EBIT margins for the property division stood at a whopping 65.6% (56.5% in FY06). However, construction margins were less than attractive at 5.4% (EBIT level)
  
  Further boost from construction? Management has indicated to us that they are eyeing at more projects under the 9MP mainly related to the education segment. It is likely that these targeted projects would involve the construction of universities or schools. We understand CBH is currently undergoing negotiations with the related parties regarding the terms. Thus far, CBH has been replenishing its orderbook very well. Within the past 3 months, the company had secured 2 projects with a combined value of RM382m. We foresee more to come from this little contractor.
  
  Rental income remains good. We were guided that 80% of its corporate offices in Three 2 Square have been rented out. The rental rates vary between RM3.30 to RM4 per sq ft. It will soon be operating a car park in the similar vicinity. On its property development, we were told that the S&P agreement to purchase the land has yet to be completed. The Mont Kiara development is also awaiting approvals from the relevant authorities.
  
  Maintain BUY. Current valuations are running very low, at 3.4x and 2.7x FY08 and FY09 earnings respectively. We recommend investor’s to accumulate this stock before it narrows the valuation gap. Our target price of RM2.02 is based on 6x FY08 earnings.

See how OSK decided to judge Crest Builder on what they did for the year. No explanation was made on why if one strips out the revaluation gains, on a q-q basis, Crest Builder's net earnings plunged from 12 million to just 6.3 million!

How?