Review

• Luster Industries (Luster) recorded substantial losses of RM24.6mn in 4Q16 due to goodwill written off (RM16.7mn) and asset impairment (4.0mn) and the forfeiture of deposit for casino of RM1.7mn as the project was halted. Excluding all these, Luster’s FY16 core losses of RM6.1mn trailed our expectation. The variance was due to the absence of profit guarantee from its Cambodia NFO units, which failed to rake in US$1mn for FY16.

• Luster’s core losses increased by 17.8% to RM6.1mn as the manufacturing unit failed to turnaround on the back of increased operating cost arising from 1) increase in minimum wage in Malaysia; 2) additional cost incurred on factory relocation, and 3) one-off retrenchment cost. Meanwhile, the gaming unit also failed to report profit for FY16 due to poor luck factor. The lottery business in Cambodia recorded RM2.0mn loss in FY16.

• Despite losses, Luster’s net cash position remained unscratched with cash surplus of RM16.4mn in Dec-16 (RM15.3mn as at Sep-16) as the losses arising mainly from non-cash expenses. The near-term liquidity risk remained low with current and quick ratio of 3.6x and 3.1x respectively.

Impact

• No change to our FY17-18 earnings projections. We believe FY17 earnings of RM3.4mn is achievable as there will be maiden contribution from property division as explained below.

Outlook

• Luster booked in RM11.1mn as property development cost in Dec-16 and we believe the company has completed the abandoned housing project, known as Taman Tasik 1Malaysia, in Perak. As such, we can expect sales of 106 units of properties to begin in 1Q17. Note that this is a build-then-sell project and Luster has recently upgraded the project status to “Kediaman Kos Sederhana”. Based on an indicative selling price of RM250k/unit, the project is expected to contribute RM26.5mn to FY17 revenue.

• The group has charged out the deposit for casino project as expenses this quarter, indicating the group is no longer going ahead with its warehousetype casino in Cambodia. We believe this is after taking into account the move to lift casino ban in Vietnam. Note that the Vietnamese government announced that from Mar-17 onwards and for a three-year trial period, citizens aged above 21 and earning at least 10mn dong per month would be allowed to gamble at two new casinos in Vietnam.

Recommendation

• We maintain Luster’s DCF valuation at 10sen/share, based on unchanged discount rate of 14%. However, given the share price has appreciated by 80% YTD, we downgrade the stock to Hold with upside potential of 11%. Future catalyst will come from Phase 2 of Taman Tasik 1 Malaysia project, which the group has the first right of refusal in completing the jobs.

• From Oct-16 to Feb-17, there was a number of off-market deals initiated by the founder, Mr. Lim See Chea, and a substantial shareholder, SUNCITY Entertainment. Mr. Lim has disposed of a total of 76.2mn shares (4.4% of outstanding shares) at price ranging from 6sen-8.5sen/share and SUNCITY has disposed of 5mn shares (0.3% of outstanding shares) at 10sen/share. During this period, Luster share price climbed from 6sen to 9sen.

Source: TA Research - 1 Mar 2017