Starburst Holdings - UOB Kay Hian 2020-11-05: Strong Turnaround Of A Niche Defence Company; Initiate Coverage With BUY

STARBURST HOLDINGS LIMITED (SGX:40D) | SGinvestors.io STARBURST HOLDINGS LIMITED (SGX:40D)

Starburst Holdings - Strong Turnaround Of A Niche Defence Company; Initiate Coverage With BUY

  • Starburst has a track record of more than 20 years in the niche defence industry.
  • Since late-2019, Starburst has won several large contracts and achieved a record orderbook of close to S$60m as of 3Q20. This has helped it to turnaround into profitability of S$4m in 9M20. As such, we expect it to achieve a growth of S$8m profit for 2020 before doubling to S$17m in 2021. We see ample opportunities for more new project wins.
  • We initiate coverage on Starburst with BUY.



Starburst - Company Background

  • Starburst Holdings (SGX:40D), which is headquartered in Singapore, is an engineering company that specialises in:
    1. the design and engineering of firearms-training facilities; and
    2. the design, fabrication, installation and maintenance of anti-ricochet ballistic protection systems for firearms shooting ranges and tactical training mock-ups.
  • Starburst serves the law enforcement, military and security agencies as well as civil authorities in Southeast Asia and the Middle East.
  • With an established track record and experience of close to 20 years in this niche industry, Starburst is one of the few companies that operate primarily in Southeast Asia and the Middle East. Its main business segments consist of firearms shooting ranges, tactical training mock-ups and maintenance services & others. Starburst's clients are mostly government civil defence authorities of their respective countries.
  • See the background of Starburst's key management and also information on Starburst's substaintial shareholders in PDF report attached below.

Business segments Firearms shooting ranges

  • Starburst designs, fabricates and installs:
    1. indoor/outdoor modular live-firing ranges;
    2. close quarters battle houses; and
    3. method of entry training facilities.
  • Unlike its competitors, Starburst designs and fabricates its own materials, which are installed in these training facilities, helping to lower costs and boost margins. These include its own proprietary Searls anti-ricochet panels, rubber lining panels and floor & ceiling baffles. The firearms shooting ranges segment earns revenue on a project-to-project basis.

Tactical training mock-ups

  • Starburst designs, fabricates and installs live-firearms and non-live-firearms, which are full-sized tactical training mock-ups for aviation/maritime environments. These include simulations for rescue & evacuation operations and other counter-terrorism & sniper operations.
  • Similar to the firearms shooting ranges, Starburst designs and fabricates its own materials, which are installed in these tactical training mock-ups. The tactical training mock-ups segment also earns revenue on a project-to-project basis.

Maintenance services and others

  • StarburstStarburst ensures that its clients’ facilities are kept in optimal conditions and that international safety standards are met and updated. Services provided include:
    1. structural and architectural steel works;
    2. ballistic protection and security systems for detention facilities; and
    3. deleading of firearms ranges.
  • Unlike the other two business segments, it earns recurring revenue on contracts of up to 3-5 years.


Starburst - Investment Highlights


Market leader in design and engineering of firearms-training facilities.

  • Starburst has a track record of close to 20 years as a specialist in the niche business of design, fabrication, installation and maintenance of anti-ricochet ballistic protection systems for firearms shooting ranges and tactical training mock-ups in Southeast Asia and the Middle East. It is one of the few companies with a track record and experience that meet the requirements of government bodies in Southeast Asia and the Middle East.
  • Since its inception, Starburst has completed projects in more than 10 countries across Southeast Asia (Brunei, Indonesia, Malaysia, Singapore and Thailand) and the Middle East (Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and the UAE).

High barriers of entry translated into high-margin business.

  • Starburst operates in an industry that requires a long-standing track record and niche expertise as it involves safety measures to mitigate ricochet during the firing of live rounds. In Singapore, the company has only two foreign competitors - Cubic Corporation and Meggitt.
  • Being the only local company gives Starburst an advantage. It is able to generate an impressive net margin of around 35% for new projects and 50% for maintenance projects. 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. We believe that the barriers to entry are high as a large amount of capex and in-depth expertise are necessary for new entrants to penetrate the industry.

Deep customer relationship and proprietary Searls materials.

  • A substantial amount of time is required for relationships to be built between contractors and clients for contracts to be awarded. This is because not all projects are based on open tenders. Some may be automatically awarded based on favourable past working relationships. We like that Starburst has a strong foothold within the defence industry as a supplier of anti-ricochet ballistic protection systems, along with its proprietary Searls materials.
  • According to management, Starburst’s competitors, such as Cubic Corporation and Meggitt, are more focused on the electrical circuitry and software aspects of targetry and weapon simulation systems as opposed to the actual designing and installation of the firearm training facilities. When clients approach Starburst’s competitors, they have to either work with Starburst or other lesser-known contractors for the designing and fabrication of their training facilities. Hence, we like that Starburst has a competitive advantage within the defence industry due to the high barriers of entry and the fact that its larger competitors do not directly compete with Starburst.

Strong turnaround in 2020 and high growth in 2021, backed by strong orderbook.

  • Since late-19, Starburst has won several large contracts and achieved a record orderbook of close to S$60m as of 3Q20. This has helped it to turnaround into profitability of S$4m in 9M20. Meanwhile, it is set to achieve S$8m and S$17m profits for 2020-21 respectively.
  • To recap, Starburst has been in a loss-making/barely-profitable position in the last five years due to low order wins. We believe Starburst’s orderbook can grow to around S$100m by end-20 as there are ample opportunities from contracts in Southeast Asia, the Middle East and, potentially, Australia.

Positive industry outlook on growing military spending.

  • 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 SIPRI, military spending in Southeast Asia and the Middle East has increased at a 10-year CAGR of 3.5% and 6.1% respectively.
  • Larger defence budgets will increase the possibility of the construction of training facilities and mock-ups. Starburst also has a good chance at securing more training range contracts, with:
    1. the upcoming S$900m SAFTI City (Singapore);
    2. the Shoalwater Bay Training Area (Australia); and
    3. the Greenvale Training Area (Australia).
  • According to SIPRI growing insecurity across the South China Sea has caused military spending to increase by 34% from 2010-19, more than any region in the world. As China rises to become a regional military power, its claims over the South China Sea has increased pressure for surrounding countries to expand their defence budget. China’s ambition in the South China Sea was seen as the most imminent threat by six of the 11 Southeast Asian members.
  • Overall military spending in Southeast Asia increased by 4.2% y-o-y in 2019, reaching US$40.5b. The largest spenders in 2019 were Singapore (28%), Indonesia (19%) and Thailand (18%). See more details on Starburst's industry outlook in PDF report attached below.

Backed by reputable strategic shareholders.

  • In 2017, Starburst entered into a business partnership with Swiss Securitas Group, one of Switzerland’s largest security service enterprises with a long-standing history dating back to 1907. Swiss Securitas Group acquired 10m vendor shares and 6m warrants from Starburst. It gave the group a 5.2% equity stake, assuming full exercise of all the outstanding warrants, excluding treasury shares.
  • Most recently, Starburst expanded its institutional base when private equity firm ICH Capital and hedge fund Eternal Glade Investment acquired an aggregate of 6.4m shares. This represented approximately 2.6% of the total issued share capital of 243,430,125 shares, excluding 10,318,300 treasury shares. We reckon Starburst would garner more institutional interest in the future as its orderbook grows along with strong profitability going forward.

Regular share buybacks and insiders’ share purchases provide confidence booster.

  • Since 2014, insiders have repurchased 861,400 shares at an average price of S$0.32. Starburst has also bought back around 11.2m shares at an average price of S$0.38. With both founders owning a combined 71% stake in the company, Starburst is an easier potential takeover or privatisation target.

Starburst - Valuation & Recomendation






Llelleythan Tan UOB Kay Hian Research | John Cheong UOB Kay Hian | https://research.uobkayhian.com/ 2020-11-05
SGX Stock Analyst Report BUY INITIATE BUY 0.61 SAME 0.61



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