Starburst Holdings has been in the red than black for far more years since its listing in 2014. However, with the restart of delayed projects, contracts won, and new expansion plans and investors, the manufacturer, engineer and builder of ricochet ballistic protection systems hopes to achieve higher profitability and more consistent earnings in the quarters ahead.
In FY2014 ended December, earnings improved 41% y-o-y to $13.2 million. But from FY2015 up until FY2019, due to a combination of contract delays, slowdown in orders and various other reasons, Starburst had reported losses, with the exception of posting earnings of $0.1 million in FY2017.
However, things are looking up for the group. In its latest 1HFY2020 ended June, Starburst recorded earnings of $2.1 million, compared to a loss of $2.1 million in 1HFY2019, as revenue nearly trebled to $9.7 million. This increase in revenue was mainly due to the deliveries of a tactical training mock-up project and firearm shooting range project in Southeast Asia and a firearms shooting range project in the Middle East.
“In the last five years, we had to rely on our maintenance projects for recurring income as the other contracts were delayed,” explains Starburst’s chief financial officer Ray Wu, although he is confident FY2020 will be a better year as the delayed projects have restarted.
While the group did not identify the delayed projects, The Edge Singapore understands this could involve Safti (Singapore Armed Forces Training Institute) City and the Australia-Singapore Military Training Initiative (ASMTI), which, according to earlier reports, are developments costing A$900 million ($871 million) and A$2 billion respectively.
New contracts secured
However, the good news is that Starburst has secured three contracts thus far this year. This includes a $40.9-million contract for the building of a firearms training facility in Southeast Asia in March, the largest single contract won so far; a $5.1-million contract to design, supply and install ballistic protection works for a specialist shooting range and associated works in the Middle East; and more recently in July, a $13.1-million contract for the design, supply and install ballistic protection works for a tactical training mock-up facility in Southeast Asia. Already, the company’s order book is $59.1 million higher than a year ago. And if the group can clinch another one or two contracts this year, this could bring the orderbook to $80 million, says Jonathan Yap, Starburst’s managing director and co-founder.
Safety with Searls
Most Singaporean men who have completed their national service will be familiar with the SAR21, the standard assault rifle of the Singapore Armed Forces infantryman. During live-firing exercises, a single misfired round or shrapnel could result in the death of a soldier, especially in the tight confines of urban warfare exercises.
“When you fire a live round and it hits a hard surface, it will ricochet and no one knows which direction it will travel and where it will hit. That is why the protection to the internal grounds of the firing range has become very essential,” explains Yap in an interview with The Edge Singapore.
Starburst manufactures and sells Searls, the anti-ricochet lining product that lines the walls of the firing ranges and close-quarter combat training rooms. These Searls panels absorb the impact from the bullet and immediately close up the point of impact. The panels can also absorb up to 4,000 to 10,000 rounds per square metre and can last for about 20 to 40 years. In addition, Starburst also designs and constructs firearms training facilities using prefabricated materials, ranging from mockups for tactical training to shooting ranges.
Expansion plans
Currently, Starburst’s clients are mostly government ministries or security forces which are seeking to construct their facilities to better train their personnel. Unfortunately, this usually means one-off contracts, creating a “lumpy” stream of income for the group. Although it receives recurring income of around $7 million a year from maintenance works, this is not enough to offset overheads and expenses which can go up to $13 million.
Yap therefore plans to secure more maintenance contracts in the near term to generate enough recurring revenue. He plans to go after maintenance-only contracts, which he believes Starburst has an advantage in, as it has been in the business for about 20 years.
“In the past, some maintenance contracts were awarded to contractors who did general maintenance and were not specialists. But as time goes by, the end users will realise that maintenance is equally important and you can’t just assign the job to any contractor,” says Yap.
However, Wu adds it will take time for this plan to make a difference in Starburst’s results, because the revenue from maintenance will only start to come in after the infrastructure has been built, and after the defect liability period expires.
Yap also has plans to expand geographical. As of now, Starburst’s main markets are in Southeast Asia and the Middle East, but he hopes to secure more contracts in Northeast Asia.
He is quick to admit this will not be easy though. “The countries [in Northeast Asia] are protective of their defence industry. So how you gain a foothold in that environment is to enter into a joint venture with a local company,” says Yap.
Countries like Japan and Korea also have mutual defence treaties with the US, and heavily utilise US-made technology and weapons. Both countries are currently home to roughly 50,000 and 28,000 American troops, respectively.
Question of national security
Yap says gaining a foothold in new markets also presents a challenge as the defence industry is inexorably tied to national security, and by extension, the tangled web of international relations. Yap says “defence contracts are not like consumer or retail goods”. He points out that there are countries where you cannot sell to due to restrictions or international sanctions.
Yap shares a previous encounter where he had to turn down the sale of some equipment to some customers due to such restrictions. He notes that he has to be mindful of geopolitical relationships and not “step on any country’s foot”. “We have to be very careful who we work with,” says Yap.
In an attempt to have better price control and management over the products the group sells and also cater to the needs of specific clients, Yap also wants to develop his own defence technology products.
The way Yap sees it, the ability to charge a lower price for customisation compared to other competitors “allows Starburst to have the upper hand”.
“We have the ability of design and we don’t have to engage anyone. You just have to tell me what you want and what your training needs are, and we will make the magic happen,” he adds.
Consistent dividends, new investors
Despite the losses over the years, Starburst has been consistently paying out dividends to investors. For the past four fiscal years, the group has been paying out a final dividend of 0.25 cent per share each.
“While they are not big sums, the dividends are a token of appreciation for our shareholders, many of whom have been with us since our IPO. So, we want to work to reward them with what we have from our cash flow,” says Wu.
Indeed, the company’s improving prospects have grabbed the attention of new investors. On Aug 13, Starburst announced that Yap and chairman Edward Lim Chin Wah have each sold 3.2 million shares to ICH Capital, a consultancy firm, and Eternal Glade Investment, an asset manager, at 39 cents each.
Edison Chen, founder of Eternal Glade and fund manager of ICHAM, agrees Starburst’s order book has been “pretty lukewarm” for the past few years. “But as long as things go according to plan, there is a very high chance that Starburst’s earnings will not only break even, but jump. The key thing is, we hope they can be sustained,” says Chen, who adds he is happy to invest even more in Starburst and introduce the group to his network of partners and investors if the projects are executed well and if the group can consistently secure more contracts.
Starburst listed on the Catalist board of the Singapore Exchange back in July 2014, selling some 50 million shares at its IPO price of 31 cents. On the first day of trading, the stock stormed out of the gates, gaining some 39% to 43 cents.
As at Sept 23, shares in Starburst closed at 41.5 cents, giving it a market capitalisation of $102.9 million. The stock is currently trading at a trailing PE of 56.5 times with a dividend yield of 0.6%.
