STARBURST HOLDINGS LIMITED
40D.SI
Starburst Holdings - RECOVERY HIT BY WEAK PIPELINE FROM MIDDLE EAST
- Low oil prices hitting project pipeline
- Southeast Asia to drive growth next year
- Downgrade to HOLD
1Q16 missed our expectations
- Starburst Holdings’ (Starburst) 1Q16 net loss narrowed 16.1% YoY to S$0.4m but still missed our expectations.
- 1Q16 revenue grew 135.3% YoY from a low base to S$6.8m due to the different work phases of projects between 1Q16 (mostly in design and fabrication phases) and 1Q15 (mostly in final installation phase).
- A large part of 1Q16 revenue was attributable to the Marina One architectural steel project in Singapore.
- As a result of the difference in work phases, gross profit jumped 220.0% to S$1.6m as gross margin improved 6.3ppt to 23.5%. However, 1Q16 gross margin improvement was offset by:
- project and production costs that grew 114.4% to S$5.2m on higher material and fabrication costs, and
- depreciation expenses, which rose 131.8% mainly due to purchase of new property in Tuas.
Wait for better clarity over contract wins
- Our investment thesis was based on earnings recovery driven by strong contract wins from the Middle East (ME) from FY16 onwards. However, we believe the sustained low oil prices have led to projects from oil- dependent Gulf States to be deferred or reduced in size. As a result, this has impacted Starburst’s expected recovery from FY16 and project pipeline in ME will likely remain uncertain until oil prices have stabilized.
- Looking ahead to FY17, we expect growth to be driven by projects in Southeast Asia (SEA), mainly Singapore, Malaysia and Indonesia.
- At least in Singapore, Minister for Home Affairs and Law K. Shanmugam has indicated that the country would step up its strategy to counter terrorism threats, which include relevant training and equipping forces with necessary weapons. Such enhancement in strategy requires similar upgrades to training facilities to match the weapon types and training carried out.
- As one of the few home-grown defence engineering solution providers, we believe Starburst will likely benefit as a result.
Lower FV from S$0.39 to S$0.30
- All said, we prefer to wait for announcements of confirmed contract wins in FY16 and expect any resulting revenues to be recognized only from FY17 onwards. Hence, we cut our FY16/17F EPS by 79.7%/17.3% and lower our FV from S$0.39 to S$0.30.
- Downgrade to HOLD.
Eugene Chua
OCBC Securities
|
http://www.ocbcresearch.com/
2016-05-17
OCBC Securities
SGX Stock
Analyst Report
0.30
Down
0.39
