SINGAPORE (Apr 3): After settling for a quiet year in 2019, Starburst Holdings is ramping up its operations and looks forward to better earnings as it starts work on new projects. Even as it announced the clinching of its largest contract ever, the company, which specialises in the design and engineering of firearms training facilities, is eyeing at least three more contracts this year.
“2019 was pretty quiet for our company, we were waiting for things like tender purchases, bidding contracts and results,” says group managing director Jonathan Yap in an interview with The Edge Singapore. “We have done three to four bids for 2020 already, and we are expecting positive results from the bids which will allow us to start work.”
While unwilling to disclose the exact amounts the projects will bring in as they have not been confirmed yet, Yap says they are each of a substantial amount, which will contribute positively to the company’s earnings.
In May last year, Starburst was awarded a $3.6 million contract to install an underwater training facility which is slated for completion this April. The ongoing Covid-19 outbreak, which has disrupted business activities around the world, has caused only minimal delays with certain parts for the facility arriving slightly later than scheduled. This facility is already at its final stage. “We have already completed the factory acceptance tests and what’s left is the on-site installations. We just have to hook up the power supply and conduct the on-site acceptance test,” he adds.
On March 16, the company reported its largest contract win ever of $40.9 million, to design and build a firearms training facility in Southeast Asia. This facility is slated for completion in February 2022. However, just like for most of Starburst’s contracts, the company is not allowed to name the clients.
Nevertheless, this contract is seen to have a positive impact on its earnings over the coming two years and will hopefully lift its share price, which has remained stuck in the 34 to 39 cents range over the past year. On April 1, Starburst shares closed at 35 cents, valuing the company at $86.27 million.
For the full year ended December 2019, Starburst narrowed its losses by 44% to $2.4 million, from $4.2 million in the previous year. This came on the back of a 29.3% increase in revenue to $9.2 million, which the company attributes primarily to contributions from the underwater training facility as well as ad-hoc works from its maintenance customers in Southeast Asia.
“Based on the largest contract we secured this year, we will have better revenue and bottomline figures in FY2020 and FY2021,” says Yap. “We see a brighter future for the next two to three years because of the contracts we have coming our way.”
The company is expecting to see a surge in both its firearm shooting ranges as well as tactical training mock-ups segments over the next three years or so. Yap shares that the gross profit margins for both business segments are at around 50% each. Starburst stands to gain higher margins from the more complex projects it takes on, which require more parts.
Starburst’s order book comes mainly from winning new building contracts, but the company pays equal attention to maintenance contracts that give it recurring revenue. “In FY2020, the maintenance will still be a critical portion of this. But we will also have increased contributions in the form of revenue recognised from the underwater training facility as well as the new [$40.9 million] contract,” he says.
Execution is key
While the company can look forward to higher revenue this year, it has to keep a very close eye on costs too. It had experienced cost-overruns before. On average, labour constitutes 45% of its costs, materials 40% and overheads about 15%, estimates Yap.
From the perspective of SAC Capital analyst Terence Chua, Starburst’s key challenge is to make sure it can meet its orders in time and within costs. “The execution of the project in this climate will be the most important consideration for the group,” says Chua, who does not have a formal recommendation on this stock.
Starburst is also careful not to bid for every potential project that comes its way. For example, it is wary of going into Myanmar and Cambodia, as Yap is not 100% certain the clients there can afford its facilities.
Due to the nature of its industry, Starburst has to keep geopolitics in mind too. “You have to be sensitive in the sense that you have to think about whether a country has been classified as one that is prone to terrorism,” says Yap. “We think good governance is important for countries we choose to work with, and we’re careful not to deal with countries that have unsavoury reputations in this area.” For instance, Starburst has turned down deals with Iran on numerous occasions due to the issue of terrorism, he adds.
For an added measure of confidence, Yap favours going back to familiar clients. For instance, Starburst’s most recent contract win is a continuation of a project it delivered in 2005. “In business, you have to form partnerships so that you can have a better preferential price for your products or services,” he says. “When we understand a customer’s intention and usage, we are in a better position to commit to them, but at a more attractive price.”
While Yap says Starburst has been lucky to emerge relatively undisrupted thus far despite the Covid19 outbreak, the latter is likely to pose some problems as countries tighten borders and impose travel restrictions. “We may see some delay in shipments, which will cause some material and labour supply disruptions. But this is something we can’t avoid,” he explains.
Furthermore, the lockdown of Malaysia did not impact Starburst’s ability to continue with its works. According to Yap, 20% of its workers are from Malaysia, and they typically only go home for the weekends. For now, they have to stay put. The biggest proportion of the workers – some 40% – are Bangladeshis, and 30% are Indians. The office staff and engineers, meanwhile, are all locals or permanent residents.
As companies in Singapore brace themselves for project cancellations or delays, Yap is optimistic that his projects will go ahead as planned. “We are not a construction or infrastructure company, we are a niche company that builds all these training facilities,” he says. “We don’t foresee cancellations because countries are spending more money on defence, and that type of expenditure is going to increase from here on.”