Review

• Luster Industries (Luster) recorded losses of RM0.3mn in 3Q16, reducing the cumulative 9M16 core profit to RM0.3mn. This accounts for 16.6% of our FY16 profit forecast of RM1.8mn. We consider this within expectations as there will be a lumpy profit guarantee to be recognised in 4Q16 if its gaming unit in Cambodia failed to rake in US1mn this year. For 9M16, the gaming unit recorded losses of approximately RM0.4mn.

• Excluding those forex and disposal losses, Luster recorded RM0.3mn losses in 3Q16 due to additional cost incurred on factory relocation. The gaming division recorded a small profit of RM0.1mn this quarter, which was still way below management’s expectation.

• For 9M16, Luster recorded core profit of RM0.3mn versus losses of RM4.4mn in the same period last year. The profit turnaround can be attributed to a series of cost-cutting measures undertaken by the plastic manufacturing division. Note that the group had trimmed the labour force and scaled down production of plastic components in 1Q16.

• On the balance sheet, Luster has a healthy net cash of RM15.3mn as at Sep- 16. Near-term liquidity risk is low as current assets was 4.0 times the size of current liabilities in 3Q16.

Impact

• Earnings forecasts maintained.

Outlook

• Luster booked in RM9.1mn as property development cost in Sep-16 as the group has completed 90% of the abandoned housing and infrastructure projects known as Taman Tasik 1Malaysia in Perak. Sales of 106 units of properties are expected to start in 1H17. According to management, the project status has recently been upgraded to “Kediaman Kos Sederhana” (from Kediaman Kos Rendah), thus allowing Luster to fix the selling price higher to not more than RM250k/unit.

• As far as the gaming unit is concerned, the group has put on hold the casino plan. For the number forecasting unit, it is expected to achieve the critical mass and turnaround in 2017 following a series of marketing activities put in place in 2016.

Recommendation

• We maintain our DCF valuation of 10sen/share on Luster, based on unchanged discount rate of 14%. Maintain Buy on the stock as current valuations are below the group’s NTA of 7.2sen, which made up mainly of PPE and cash. 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.

Source: TA Research - 23 Nov 2016