Points to Ponder

Appointment and resignation of managing director. The recent share price rally after series of corporate events and exercises since June-16 left us ponder what’s cooking in the company. First, the appointment of Mr. How and two other related parties as board of directors and the subsequent MoU with Citi-Champ (owned by Mr. How) to explore car hauling business in Hong Kong, led us to believe that the company is exploring other business opportunities to diversify earnings risk. However, the MoU was terminated in Dec-16 and Mr. How and related parties resigned from the Board 7 months after the appointments.

Founder disposed shares and proposed 10% share placement. Then, we observed the founder, Mr. Lim See Chea, has disposed his stake in Luster from Oct-16 to Jan-17. The management expressed that is nothing peculiar as the disposals were parts of Mr. Lim’s financial planning. However, we are puzzled later by the proposed 10% private placement by the board of directors (which Mr. Lim is the executive director) of Luster, which will further dilute Mr. Lim’s stake and control over Luster. Note that Mr. Lim has disposed of 4.4% stake in Luster at prices ranging from RM0.06-0.085/share and Luster has recently fixed the price of placement share (first tranche) at RM0.105/share.

Share price rallied while the founder disposed shares. Another anomaly is the rally in share price despite Mr. Lim disposed his stake in the company. The share price has doubled from 0.06sen/share in Oct-16 (when Mr. Lim sold 10mn shares) to 12sen/share yesterday. Although this can be partially attributed to the recent contract win (see report dated 13 March 2017), we doubt that the project alone could lead to the rally in share price.

Why raise additional funds when the company is in net cash? To clear the air, we study the utilization of fund from private placement where the bulk of the proceeds (RM26.9mn or 99% of total placement shares) will be allocated for property development expenditure and working capital. For the property development, the proceeds (RM15mn on maximum scenario) will be equally distributed between 2 projects; i.e.: TT1M (see report dated 10 March 2016) and Alwaqf projects. However, we wonder about the need to raise fund when the company is having sufficient net cash. Note that Luster’s net cash stood at RM16mn as at Dec-16.

Mosaic theory. Our mosaic theories of the above anomalies are that: 1) Luster could be exploring a new business opportunity (after car hauling business failed to materialize) and could be very close to signing a deal/s where the capex would be funded by the placement proceeds; 2) Mr. Lim could be slowly letting go of his responsibility and control over Luster (following the disposal of shares) and there may be changes in board of directors of the company (placement of share to new shareholders).

Land purchase or casino project? As far as the deal is concerned, the deal could be related to any land purchases in Malaysia or a casino project in Cambodia. Our basis is that Luster has recently secured two property development projects and the company may further expand this division to diversify the group’s earnings. Also, Luster possesses a casino licence in Cambodia and it may kick-start its casino development plan soon.

Financial impact

No change to our FY17-19 earnings projections.

Recommendation

We maintain Luster’s DCF valuation at 10sen/share, based on unchanged discount rate of 14%. However, premised on our mosaic theories above, we put our call under review until further corporate actions (if any) on business diversification, change in shareholders and directors and the conclusion of the placement of shares.

Source: TA Research - 13 Apr 2017