Contract award

Luster Industries (Luster) announced that the company has secured a construction contract from Cosmo Property Management Sdn Bhd for the completion of a mixed development project in Kota Bharu known as “Alwaqf”. This property development comprises 3 phases, featuring 99 units of 5-storey commercial lots with 1-level basement car park (phase 1), a block of 13-storey 505 units of serviced apartments (phase 2), and a commercial complex with 256 units of commercial lots, rooftop garden, convention hall, Cineplex, food court and other common facilities. The project owner is Perbadanan Menteri Besar Kelantan.

According to announcement, the project has been partially completed and the structure of the building has already reached level 12. Luster is tasked to complete the jobs and Cosmo will be appointed as sub-contractor. According to management, the balance works consist of 4-storey construction works for the serviced apartments together with all the common facilities, e.g.: swimming pool, rooftop garden, etc. The contract sum for the balance works is estimated at RM45mn and the project is expected to be completed by end-2017

Our View

We are neutral on this contract award as we believe the contract margin would be as low as 2-5% given the limited project risk involved. Based on the agreement where Cosmo will be appointed as the sub-contractor to complete the jobs, Luster would only participate in project management role.

Financial impact

Assuming an EBIT margin of 3%, we raise our FY17 earnings by approximately RM0.4mn to RM3.9mn to factor in contribution from this contract. No change to FY18-19 earnings projections.

Recommendation

We maintain Luster’s DCF valuation at 10sen/share, based on unchanged discount rate of 14%. As this contract is insignificant to Luster’s earnings (increase by only RM0.4mn for FY17), we maintain our Hold recommendation on the stock. 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 - 13 Mar 2017