Starburst Holdings - SAC Capital 2021-08-31: A Burst Of Energy, 1H21 Revenue Shot Up By 2.1x


Starburst Holdings - A Burst Of Energy, 1H21 Revenue Shot Up By 2.1x

  • Starburst (SGX:40D)'s 1H21 revenue rose more than doubled from S$9.7m to S$20.5m, with more projects on hand with the commencement of three projects (see below), which almost last year’s full year revenue. Post-reporting period in July, Starburst secured new contracts worth S$4.7m.
  • Recurring revenue (i.e. maintenance services) was flat at S$3.8m, but with the higher revenue clocked in 1HFY21, it made up a smaller 18.7% of total revenue, compared to 39.5% a year ago.
  • Gross margin increased from 45.9% in 1H20 to 60.3% in 1H21, due to economies of scale from more projects undertaken. Starburst also booked a one-off forex gain of S$0.1m. Net profit jumped 3.5x, from S$2.1m to S$7.4m.
  • Starburst declared a S$0.06 per share dividend, translating to a 20.0% payout of 1H’s net profit.

Projects on hand that will add to 2H21’s revenue

  • Currently, Starburst's reported total orderbook on hand sits at ~S$69.6m.
    • A S$4.7 million contract for the supply, delivery and installation of range equipment and specialist works for firearms training facilities in Southeast Asia and the Middle East and North Africa, which is scheduled to be completed by August 2022.
    • 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, which is scheduled to be completed by November 2022.
    • A S$6.4 million contract for the design and build of an indoor shooting range training facility in Southeast Asia, which is scheduled to be completed by April 2022.
    • 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.
    • 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. (completed)

Warrants expired 14 June 2021

  • On 15 June 2016, Starburst issued 62.5m warrants at an issue price of S$0.01 for each warrant, at an exercise price of S$0.25 for each new share. The warrants will expire on 14 June 2021.
  • In 1H21, Starburst's total number of shares increased by 25K with the exercise of warrants. In FY20, 7.5m new shares were issued. The warrants are dilutive in nature. Starburst's total number of shares increased to 259.49m as at 30 Jun, from 259.46m as at 31 Dec.

Geopolitical tensions an ironic opportunity

  • From the India-China border disputes, to China-Taiwan tensions, to the US-China trade war that has yet to be resolved, the US’ withdrawal from Afghanistan adds to the ongoing geopolitical tensions around the world. Violence remains rampant with the intensification of conflicts in some.
  • Starburst’s revenue from the Middle Eastern region made up 28.8% of its 1H’s revenue, compared to 13.7% a year ago, reflecting higher spending potential. With a fall in peacefulness in the region, Middle East’s defense expenditure can be expected to expand at a robust pace amid elevated threats.

COVID-19 may have trimmed defense budgets

  • According to International Institute for Strategic Studies, defence spending by Middle East countries is less than previously expected. With budget cuts, and adjustments to estimates, the total defense spending by six Middle East countries has been revised down by US$46.3 billion. Saudi Arabi is ranked sixth in the world for its military spending, at US$57.5 billion recorded in 2020 (2019: US$61.9 billion).
  • As a percentage of GDP, however, the Middle Eastern countries still show sizable military spend, with Oman taking the number one spot at 11.0% of GDP, and Saudi Arabia at 8.4%.
  • While tensions drive defense spending and potentially higher demand for training facilities, political instability may cause project delays which raise Starburst's operating costs.

Key risks:

Lim Li Jun Tracy SAC Capital Research | 2021-08-31
SGX Stock Analyst Report NOT RATED MAINTAIN NOT RATED 99998.000 SAME 99998.000