Friday 29 Mar 2024
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This article first appeared in Capital, The Edge Malaysia Weekly, on March 14 - 18, 2016.

Luster Industries Bhd agreed on March 9 to build 106 units of terraced houses in Pengkalan Hulu, Perak. The agreement with Aznel Development and Koperasi Hartanah Bhd for the Taman Tasek 1 Malaysia project comes just a fortnight after Luster announced over RM17 million losses for FY2015, mainly due to a RM12.1 million goodwill write-off and impairment losses.

Last May, the company diversified into the Cambodian gaming market, buying 60% of Pan Cambodian Lottery Corp. The gaming division, with only five months of contribution in FY2015, raked in RM1.88 million in earnings from revenue of RM4.33 million. Luster’s contract manufacturing division — which contributed over 90% of group revenue in FY2015 — ended with wider losses of RM1.35 million.

Yet, TA Securities remains bullish on the Cambodian business and retained a “buy” recommendation and 12 sen target price on March 10. “All-in, we are positive on this [housing] development, which would help diversify earnings risk stemming from its manufacturing division,” TA said, adding that it is confident Luster “has a good chance” of securing Phase 2 with 194 units.

If TA Securities is right, Luster’s warrants might see increased interest as well. Trading volume on Luster-WA jumped to 2.97 million last Wednesday from largely under 500,000 a day for the past five weeks.

Luster-WA, which has six years to run before expiring in June 2022, has a one-for-one conversion ratio and 10-sen strike price. Closing at 3.5 sen last Wednesday, Luster-WA was trading at almost a 93% premium to the underlying shares that closed at seven sen apiece or 0.78 times its end-2015 unaudited net assets per share of nine sen.

Luster-WA was up 40% from its 52-week low of 2.5 sen on Aug 24 last year, while the mother share was up 7.7% from its 52-week low of 6.5 sen on Aug 26, 2015. These percentage gains would be interesting to those who reckon Luster-WA can continue to command at least a 50% premium to the underlying stock. Otherwise, the mother share seems to be the better bet. If TA’s 12 sen price target is achievable, there is 71.4% upside potential from last Wednesday’s close for the underlying share,  which hit a 52-week 52-week high of 11.5 sen on April 28 last year. Luster-WA’s 52-week high was 5.5 sen on April 20 last year.

Some RM7 million would be needed to build Phase 1 of Taman Tasek 1 Malaysia. TA estimates the gross development value of the project at RM16 million, assuming an average sale price of RM150,000, and expects contribution from the project to begin in FY2017. TA has raised its FY2017 earnings by 43% to RM6.7 million, expecting FY2016 net profit to come in at RM3.4 million, implying six times FY2016 earnings and three times FY2017 earnings at the 12-sen target price.

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