Starburst Holdings - SAC Capital 2021-03-05: FY20 Profit Shot Into The Black


Starburst Holdings - FY20 Profit Shot Into The Black

  • Starburst's revenue surged 135.5% from S$9.2 million in FY2019 to S$21.8 million in FY2020.
  • Net profit from recurring revenue increased 22.2% y-o-y from S$4.1 million in FY2019 to S$5.0 million in FY2020.
  • Global defense spending hit record levels in 2020 amid COVID-19.

A profitable FY2020

  • Starburst (SGX:40D) saw a 135.5% increase in revenue from S$9.2 million in FY2019 to S$21.8 million in FY2020. The increase in revenue was mainly derived from two tactical training mock-up projects and a firearm shooting range project in Southeast Asia, and a firearm shooting range project in the Middle East.
  • Starburst turned the net loss of S$2.4 million in FY2019 around, to see positive profit of S$9.1 million in FY2020. Gross profit margin increased from 46.5% in FY2019 to 55.0% in FY2020.
  • Firearm shooting ranges and tactical training mock-ups segments which make up project-basis revenue add up to 69.8% of total FY2020 revenue.
  • Recurring revenue, which consists of the maintenance and other services segment make up 30.1% of the total FY2020 revenue. Net profit from recurring revenue increased 22.2% y-o-y from S$4.1 million in FY2019 to S$5.0 million in FY2020.
  • Starburst aims to expand its portfolio of maintenance service contracts and grow its recurring revenue base by working with the relevant authorities.

New projects secured

  • In December 2020, Starburst announced the award of a S$7.9 million contract for the design, supply, installation, testing and commissioning of an indoor and outdoor shooting ranges training facility in the Middle East. The contract commenced in December 2020 and is scheduled to be completed by November 2022.
  • The second project, announced by Starburst in February 2021 is for the award of a S$6.4 million contract for the design and build of an indoor shooting range training facility in Southeast Asia. The contract is scheduled to commence in February 2021 and to be completed by April 2022.
  • The third project, announced by Starburst in February 2021 is for the award of two contracts aggregating to a value of S$9.7 million for maintenance services works, which have a base contract period of 3 years with an option to renew for another 3 years, ending December 2026 and February 2027 respectively.
  • Other projects previously secured by Starburst that will add to revenue in 1HFY21 include:
    • A S$40.9 million contract involving design, supply, delivery and installation of a firearms training facility in Southeast Asia, which is scheduled to be completed by February 2022.
    • A S$13.1 million contract involving the upgrading of a tactical training mock-up facility in Southeast Asia, which is scheduled to be completed by July 2021.
    • A S$5.1 million to design, supply and install ballistic protection works for a Specialist Shooting Range and associated works in the Middle East, which is scheduled to be completed by June 2021.

Global defense spending hit record levels in 2020 amid COVID-19

  • The defense sector thrived during this uncertain period with heightened tensions between countries. According to IISS, global military spending in 2020 increased by 3.9% y-o-y to US$1.83 trillion, on top of the 4% y-o-y growth seen in 2019. Military spending is expected to continue growing at CAGR of about 3% until 2023 to reach US$2.1 trillion.
  • In the ASEAN region, total defense spending has doubled over the last 15 years. Similarly in the Middle East, ongoing geopolitical tensions and violence remains rampant with increased terrorist activity and intensification of conflicts. While tensions drive defense spending and potentially higher demand for training facilities, political instability may cause project delays which raise operating costs.
  • Starburst seeks to capture growing opportunities in Southeast Asia and the Middle East to further solidify its position in the region’s defense sector. The Group has been actively responding to the growing demand for military equipment by designing and engineering customised training solutions. Growth drivers of defense spending in Southeast Asia include modernisation programs to include more dynamic training, protection against attacks on sea-ports, airports and government buildings, and overall higher investment in critical infrastructures.
  • Political instability, specifically in countries like Thailand, Malaysia and Indonesia may, however, bring about adverse impact and uncertainties if the political turmoil and protests persist for a prolonged period.
  • Although Southeast Asia remains the bulk of the revenue driver, Starburst recognises that threat of terrorism makes Middle East an opportune market to tap into. The Middle Eastern region shows a strong link to the total regional government expenditure.
  • According to SIPRI, out of the top ten defense spending nations per capita in 2019, four are in the Middle East. This is due to the fall in peacefulness over the past decade which was caused by the increased terrorist activity and the intensification of conflicts from ongoing geopolitical tensions. Middle East’s current and future defense expenditure can be expected to expand at a robust pace amid elevated threats.

Starburst's Business Segments

Firearm Shooting Ranges

  • Starburst designs, fabricates and installs anti-ricochet ballistic protection systems at live-firing ranges to prevent fired rounds from ricocheting. This involves the installation of their proprietary “Searls” anti-ricochet panels, rubber lining panels and floor and ceiling baffles at indoor, outdoor and modular live-firing ranges, close quarters battle houses and method of entry training facilities.

Tactical Training Mock-ups

  • The tactical training mock-ups business segment pertains to design, fabrication and installation of live-firearms and non-live firearms tactical training mock-ups to suit each desired training scenario. The mock-ups seek to provide simulations which emulate real-life scenarios, and thus involve the examination of various elements of the desired mock-up to ensure that details are replicated. Tactical training mock-ups include rescue and evacuation operations, aviation and maritime operations, sniper operations and other counter terrorism operations.

Maintenance Services and Other Activities

  • The maintenance programmes for completed firearm shooting ranges and tactical training mock-ups facilities require continual monitoring to ensure that they are kept in optimal condition as described in the initial design criteria and maintenance manuals, and that international safety standards are met and updated if necessary, in order to ensure that usage of the customers’ training facilities is maximised, downtime is minimised and safety is not compromised.
  • In connection with, and in addition to their principal activities, Starburst also design, construct and install ballistic protection and security systems for various facilities, including high security detention facilities. Additionally, Starburst design, supply and/or fabricate steel struts and steel beams for temporary or permanent structural and architectural steel works on a selective basis.

Starburst (SGX:40D)

Lim Li Jun Tracy SAC Capital Research | https://www.saccapital.com.sg/ 2021-03-05
SGX Stock Analyst Report NOT RATED MAINTAIN NOT RATED 99998 SAME 99998