SINGAPORE (June 14): CIMB Securities likes Starburst Holdings, an engineering group specialising in the design and engineering of defence training facilities, as a “niche defence company with high entry barriers” – and foresees a sustained turnaround for the Catalist-listed company post its 1Q17 results.
In a non-rated report on Tuesday, analysts Ngoh Yi Sin and William Tng note the improvement shown in Starburst's 1Q17 core net profit and gross margin as well as its low net gearing ratio of 5.3% as at end-1Q.
They also highlight how the company has consistently rewarded shareholders with dividends in FY14-16, even during the loss-making years.
(See also: Starburst turns in profitable 1Q with $0.4 mil in earnings)
“Armed with a 16-year track record and strong technical know-how, the company operates in a niche area of the highly opaque, strictly regulated defence industry, which elevates the barriers to entry for new players. Starburst sees itself as a proxy to higher military spending in Southeast Asia and Middle East, underpinned by rising tensions and continual terrorism threats,” observe the analysts.
“Disposal of its old factory in 1Q17 for $7 million, together with the 2016 warrants issuance, could further strengthen its cash position for larger-scale projects and M&A opportunities, according to management.”
While acknowledging that the company’s earnings tend to fluctuate due to the ad-hoc nature of its projects and varying intensity at each phase, Starburst’s management intends to build up recurring income via more maintenance service contracts.
This includes – as recently reported in the media – the joint development of military training areas and facilities between Singapore and Australia, as well as the 10-year, $900 million development of the Singapore government’s upcoming SAFTI City, a simulation environment to be built in place of the existing SAFTI training area.
“The company reckons it is well-placed to secure both contracts, with 10-20% possible share of each contract value,” note Ngoh and Tng.
“Starburst also announced a strategic partnership with Swiss Securitas Group, a global security consultant and solutions provider. This partnership involves Swiss Securitas Group taking a 5.1% equity stake in the listed entity, while Starburst will acquire its subsidiary, Swiss Securitas Asia, for S$0.6m in exchange. Management sees this as synergistic to its service offering, as well as providing a gateway to the European market,” they add.
As at 11.23am, shares of Starburst are trading 1 cent higher at 36 cents.
