UOB Kay Hian has initiated coverage of Starburst Holdings on its strong turnaround as a niche defence company. In a Nov 5 note, UOB Kay Hian analysts Llelleythan Tan and John Cheong recommend ‘buy’ on the Singapore-headquartered company, with a target price of 61 cents.
Starburst Holdings, which is headquartered in Singapore, is an engineering company that specialises in the design and engineering of firearms-training facilities and the design, fabrication, installation and maintenance of anti-ricochet ballistic protection systems for firearms shooting ranges and tactical training mock-ups.
It serves the law enforcement, military and security agencies as well as civil authorities in Southeast Asia and the Middle East.
“Starburst has a track record of more than 20 years in the niche defence industry,” say Tan and Cheong. “Since late-2019, it has won several large contracts and achieved a record orderbook of close to $60 million as of 3Q20. This has helped it to turnaround into profitability of $4 million in 9M20. As such, we expect it to achieve a growth of $8 million profit for 2020 before doubling to $17 million in 2021. We see ample opportunities for more new project wins.”
In its latest 1HFY2020 ended June, Starburst recorded earnings of $2.1 million, compared to a loss of $2.1 million in 1HFY2019, as revenue nearly trebled to $9.7 million.
See: Starburst aims for turnaround in FY2020; guns for more maintenance contracts and products
In comparison, Starburst has been in a loss-making or barely-profitable position in the last five years due to low order wins, say the analysts. “We believe Starburst’s orderbook can grow to around $100 million by end-2020 as there are ample opportunities from contracts in Southeast Asia, the Middle East and, potentially, Australia.”
In August, two of Starburst Holding’s controlling shareholders, executive chairman Edward Lim Chin Wah and managing director Yap Tin Foo, each sold 3.2 million shares at 39 cents each to a group of investors.
The investors, which include ICH Capital and Eternal Glade Investment, bought from Lim and Yap at a discount of 7.9% off Starburst’s one-day volume-weighted average price of 42.34 cents.
In Tan and Cheong’s note, Starburst’s major shareholders are Lim and Yap, who hold 35.81% and 33.86% respectively.
Tan and Cheong also highlight the high barriers of entry present in the sector, with the company’s expertise translating into a high-margin business. “In Singapore, the company has only two foreign competitors - Cubic Corporation and Meggitt. Starburst is able to generate an impressive net margin of around 35% for new projects and 50% for maintenance projects,” say the analysts.
“It has also been building up its maintenance contracts as every greenfield project requires regular maintenance. Starburst has an advantage over the other maintenance contractors as they lack the capabilities to maintain facilities without compromising on safety,” they add.
Looking ahead, Tan and Cheong cast a positive industry outlook on growing military spending in and out of the region. “Military spending has consistently grown in Southeast Asia and the Middle East over the last two decades due to growing tensions and neighbouring threat in the regions. According to Stockholm International Peace Research Institute (SIPRI), military spending in Southeast Asia and the Middle East has increased at a 10-year compound annual growth rate (CAGR) of 3.5% and 6.1% respectively. Larger defence budgets will increase the possibility of the construction of training facilities and mock-ups.”
As at 11.10am, shares in Starburst are trading at 1.5 cents higher, or 3.61% up, at 43 cents.