• Established track record in niche industry
• Beneficiary of the expected increase in defence spending
• Initiate BUY with S$0.39 FV

More than 15 years of experience under its belt Starburst Holdings Limited (Starburst) is an engineering solution provider of firearms training facilities, and has established its track record in Southeast Asia since 1999 and more recently, in the Middle East, post-listing on the SGX. With 61% of FY14 revenue generated from Southeast Asia, we believe its exposure includes that of Singapore, Malaysia, Indonesia and Brunei.

Typically, established track records are needed before these government bodies engage any contractor for defence-related works. In this case, Starburst has accumulated more than 15 years of experience in this niche industry and currently engages in three business segments: 1) firearm shooting ranges, 2) tactical training mock-ups, and 3) maintenance services.

Threat of terrorism driving increase in defence spending

The world today is facing increasing threat of terrorism, especially evident in the Middle East, which stems from the rise of the Islamic State or ISIS. Terrorism has led to violent clashes that cost lives of many innocent civilians, as parts of Iraq and Syria are taken-over by the ISIS. While these threats are more prevalent in Iran, Syria and Turkey, we note the expanding presence of ISIS as smaller groups operate out of other Middle-Eastern countries.

Closer to home, there are reports of expanding presence of ISIS in Southeast Asian countries such as Singapore, Malaysia and Indonesia, with more cases of radicalization through online videos. Accordingly, data from BMI Research indicates that governments in both the Middle-Eastern and Southeast-Asian regions are expected to step up defence spending over the next few years to better train and equip their military forces.

Initiate with conviction BUY; TP S$0.39

In view of the strong increase in defence spending, which we believe will drive Starburst’s growth ahead, we initiate with a conviction BUY at S$0.39 FV. Our FV implies a 10x blended FY15/16F PER, which is at a 35% discount to peers’ average given its small company size relative to peers and much lower market liquidity.

Source: OCBC Research - 8 Oct 2015