Dated 19/10/2020, Luster Industries Berhad (5068) had seen their share price increased by 28%, then announced that they are going to venture into the glove business by the end of trading day. So, will LUSTER be one the new glove titan, or would it be just another short term scheme?
In my humble opinion. LUSTER will definitely become a powerful glove counter. Why?
Let's take a look at the big picture of the announcement:
On behalf of the Board of Directors of Luster ("Board"), UOB Kay Hian Securities (M) Sdn Bhd ("UOB Kay Hian") wishes to announce that the Company proposes to undertake the following:-
(i) A joint venture arrangement between Fortune Tac Sdn Bhd ("FTSB") and Luster to jointly undertake the business of manufacturing, sales and distribution of gloves;
(ii) A diversification of the existing principal activities of Luster and its subsidiaries ("Luster Group" or the "Group") to include manufacturing, sales and distribution of gloves ("Gloves Business"); and
(iii) Proposed private placement of 482,150,000 Placement Shares, representing approximately 20% of the total issued Shares at the subscription price of RM0.125 ("Subscription Price") per Placement Share to the identified placees, the details of which are set out in Sections 4 and 4.2 of this announcement.
In short, LUSTER will form a new joint venture company with FTSB under the name Glovmaster Sdn. Bhd. ("GSB"), with LUSTER having 56% of the stakes, and FTSB holds the remaining 44%.
The role of LUSTER in this joint venture agreement would be overseeing the overall construction and setup of the nitrile glove manufacturing glove (Bear in mind, spot prices of nitrile gloves are ~70 - 80 USD / 1,000 pieces), the FTSB will involve in the construction aspect, and to contribute the technical knowhow into the business.
So.. who is this FTSB, and what makes them so special that they could form a JV and contribute to the glove business?
The director and substantial shareholder of FTSB - Mr. Yee Voon Hon ("Mr. Yee") had since 2010 left the family business and venture into the glove manufacturing business. Currently, he is running 8 production lines with total production capacity of 90 million pieces / month. Hence, Mr. Yee is definitely qualified to help LUSTER in becoming the next glove titan!
Okay, now we know that LUSTER definitely would have the technical knowhow in this business with the participation of Mr. Yee. But even with that, can the company remain profitable?
In the JV agreement, LUSTER had protected themselves by having a profit guarantee in which they are guaranteed to have:
Pursuant to the JVA, FTSB has undertaken to Luster on the following:-
(i) The total output of the gloves for the first 2 years commencing from the full commencement of manufacturing operation of the Gloves Business shall not be less than 3 billion (3,000,000,000) pieces;
(ii) The aggregate profit before tax for the first 2 years commencing from the full commencement of manufacturing operation of Gloves Business shall not be less than RM200.0 million (RM200,000,000.00) ("PBT Guarantee"), which is conditional upon, amongst others, the following:-
a. Force majeure, including but are not limited to, acts of any civil or military, authority, fires, strikes, lockouts, labour disputes, epidemics, governmental restrictions, wars, earthquakes, storms, typhoons, landslides and floods etc., hindering the manufacturing, marketing and sales operations; and
b. There exists any causes or incidents beyond the operational and/ or marketing and/ or management control of GSB. In the occurrence of any adverse events that GSB is not able to achieve the PBT Guarantee, the parties of the JVA shall negotiate on good faith basis and will endeavour to co-operate with each other to give full effect to the intent of this JVA.
From the glove manufacturing perspective, FTSB MUST help LUSTER to achieve PBT of RM 200 Million. With the standard tax rate on companies of 24%, we can assume that the net profit of LUSTER's new JV to achieve RM 152 Million on the minimum basis for 2 years.
But to be honest, I think RM 152 Million might not be a reasonable answer. Why? With their 3 billion minimum guaranteed production capacity, if you reduce the ASP to ~70 USD / 1,000 pieces, you would get a number of RM 840 Million in revenue, and RM 420 Million per year. This is on the assumption that the factory is running at 75% of total capacity (Based on the announcement, LUSTER's factory may support up to 2 billion pieces of gloves production per annum).
Can you tell me which glove company might run at 75% of the total capacity?
Now, with the new norm of 30 - 40% of net profit margin for glove company, the net profit of this business will easily hit RM 147 Million on a single year. And with their new NOSH in the market of roughly RM 2,893 Million shares, the average EPS per share is RM 0.0508, and yes this is after the private placement dilution.
Currently, LUSTER is trading at RM 0.225, hence a P/E of 4.4 times on their expected profitability? Even if you cut the profit of RM 147 Million by half, LUSTER is merely trading at P/E of 8.8 times! You tell me, would you invest in TOPGLOV, SUPERMX, or even MAHSING if I were to tell you their P/E is 8.8 times??
At the very least, LUSTER should have a P/E of 20 times, which when translated into share price, RM 1.016. There are much space to play around even at current share price.
Whether you like it or not, I will accumulate more LUSTER shares on the basis of anything below RM 0.600. If you do not do so, I'm guessing you missed out the glove rally wave last round too due to your fears. Make a sound investment decision!