STARBURST HOLDINGS LIMITED
40D.SI
Expect a better 2H15
- Another quarterly loss; delays in contract wins and handover of projects hit gross margins.
- Plans to double production capacity to undertake bigger contracts.
- Outlook remains buoyant; both SEA and Middle East expected to increase defence spending.
- Maintain BUY, TP S$0.54.
Highlights
Another quarterly loss.
- Starburst reported another quarterly loss of S$1.4m in 2Q15, as expected. 1H15 net loss amounted to S$1.9m, on the back of S$7.0m revenue. Revenue contribution was largely derived from work done on the final phase of a firearm shooting range project and a tactical training mock-up project in Southeast Asia, both of which were completed in June 2015.
Delay in contract wins and handover of projects hit gross margins.
- The lower revenue was mainly due to delays in contract wins and handover of projects. In 1H15, most of the projects were secured earlier and near completion stages which involved comparatively lower level of fabrication and installation works. Thus, gross margins fell to 5.2%, vs 56.4% in FY14.
Outlook
Plans to double production capacity to undertake bigger contracts.
- Starburst has completed the acquisition of a new property in Tuas, Singapore. With a larger land area of about 8,805.6 sqm and remaining land tenure of approximately 43 years, the new property will enable the Group to increase its fabrication efficiency and capacity, and to undertake a higher number as well as larger projects simultaneously.
Expect a better 2H15.
- We expect Starburst to report a better 2H, based on S$37.5m worth of contracts and letter of intent for projects and maintenance work secured in 1H15.
- FY17F should be a much better year, with the expected award of a few big contracts in the range of S$20m to S$60m each. Based on progressive booking method, we expect Starburst to book revenue of S$22m for FY15F, which is similar to its FY13 level, before the ramp-up in FY14.
Outlook remains buoyant.
- Starburst, a niche defence play, is a beneficiary of higher defence spending in Southeast Asia (SEA) and the Middle East. To counter the trend of increasing terrorism threats globally, military and law enforcement authorities will have to better equip their security personnel with more effective and more intense training on the use of live firearms.
Both SEA and Middle East expected to increase defence spending.
- SEA is actively upgrading and modernising facilities, partly to protect critical infrastructure. In the Middle East, the implementation of compulsory military service is propelling demand for new shooting ranges in Middle East. Countries like Saudi Arabia and UAE are expected to accelerate defence spending
Valuation:
- Our target price of S$0.54 is based on 14x FY16F PE, which is pegged to 30% discount to peers’ average of 20x forward PE.
Key Risks:
Mainly dependent on project-based non-recurring contracts.
- Starburst’s business is largely made up of non-recurring contracts, which is dependent on its ability to secure new contracts. Customer concentration - contracts mainly from government agencies. Historically, a substantial proportion of Starburst’s revenues were derived from contracts entered into indirectly with governmental agencies in Southeast Asia and the Middle East.
Capital-intensive business.
- The contract sums for projects are payable by customers progressively, based on the stage of completion of the work carried out for the relevant project. Starburst may have to put up capital to fund the working capital of projects.
LING Lee Keng | http://www.dbsvickers.com/ DBS Securities 2015-08-13
0.54
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