Excerpts from Lim & Tan Securities report
Analyst: Ethan Aw
|We initiate coverage on Starburst Holdings with a BUY recommendation and a TP of S$0.60 based on 10.6x FY21F P/E, pegged to a 30% discount to the FY21F peer average P/E of 15.1x.
Despite COVID-19’s damage to the global economy, we like that Starburst remained defensive and even turned profitable in 1H20 with a NPAT of S$2.1mln.
We find its FY21F valuations undemanding relative to peers.
As we expect Starburst to be recognizing the bulk of their S$60mln order book in 2H20 and FY21, we anticipate 2H20 earnings to surge above S$5mln before accelerating to S$17.2mln for FY21, translating to a FY21F P/E of 7.3x vs its peer group average of 15.1x.
|"As management delivers on its contract wins while securing additional ones, along with possible higher dividend payments, we believe Starburst could trade up to 10.6x FY21F P/E at S$0.60 a share."
-- Lim & Tan Securities
Upcoming S$60mln order book to be fulfilled. Since late 2019, Starburst managed to clinch 3 key contracts which brought its orderbook up to c. S$60mln.
Projects typically run on a 2-year timeframe and we expect the bulk of this revenue to be recognized in FY21.
Management has indicated that they are negotiating for more projects, which could likely bring their orderbook up to S$80-100mln by the end of FY20.
Favorable growth in military expenditure. Military expenditure has been on a consistent rise in both South-East Asia and the Middle East over the last two decades due to neighbouring threats and the growth in tension.
SEA’s military spending increased at a CAGR of 3.5% over the past decade while ME’s military spending grew at a CAGR of 6.1% from 2004 to 2014.
Larger defence budgets will increase the possibility of the construction of training facilities and mock-ups aside from only purchasing and upgrading weaponry.
The upcoming S$900mln SAFTI City (SG), Shoalwater Bay Training Area (AU) and Greenvale Training Area (AU) should also give Starburst a good chance at securing more training range and mock-up contracts.
High barriers to entry with strong foothold within the defence sector. Defence contractors require long track records to be awarded projects since safety is of utmost importance.
Long working relationships are also essential since not all projects are based on open tender, especially in the Middle East.
This makes it difficult for new entrants to penetrate the industry along with the large CAPEX investment and technical knowledge required to cater to customers’ specifications.
With more than 20 years of engineering experience within the defence industry, Starburst is well positioned with a strong foothold as compared to any new entrants.
Potential increase in recurring income base. Since Starburst manages the designing, fabricating and installation of training facilities, they tend to be awarded the maintenance contracts for them as well.
This is because commercial maintenance contractors lack the capabilities and understanding of the training facilities to adequately maintain them without compromising on safety.
Maintenance contracts have also been getting longer. Instead of the usual 3+3+3 / 5+5+5 years, some are stretching to 10+10 years.
This will ensure a stable stream of recurring income for Starburst in the long run.
|Favouring shareholders with dividend payouts. Despite being loss-making post IPO, we like that Starburst still focused on shareholder welfare by paying out dividends (0.25S cents per share) to shareholders.
Moving forward, having an increase in maintenance contracts for recurring income will produce more consistent cash flows for Starburst.
Along with the new award in contracts, this should also allow for an increase in dividend payout for shareholders.