• Weak 3Q15
• Opportunities abound in Middle East
• Reiterate BUY with S$0.39 FV

3Q15 back to profitability but 9M15 still in the red

Starburst Holdings Ltd’s (Starburst) 3Q15 revenue declined 53% YoY to S$3.5m due to lower contribution from fabrication and installation works on completion of projects in both Southeast Asia (SEA) and Middle East (ME). The weak quarter did not come as a surprise to us as delays in infrastructure handover from the main contractor as well as higher than expected costs were already impacting 1H15.

As a result of these factors spilling-over to 3Q15, gross profit dropped 66% YoY to S$1.6m. In addition, new contracts secured in 1H15 from both SEA and ME have yet to contribute meaningfully as they were still at the initial phases of execution. Consequently, as 3Q15 operating expenses fell by a slower rate (compared to revenue decline) of 34% YoY, PATMI was 86% lower at S$0.2m, but turned profitable after seeing two consecutive quarters of losses in 1H15.

Earnings to recover from FY16

We believe the macro-environment for defence industry will continue to be supportive of Starburst’s growth outlook. The expected increase in defence spending as a result of the increasing threat of terrorism is a strong indicator that opportunities abound in both the SEA and ME regions. Implementation of compulsory military service in some of the ME countries also provides a clear signal that demand for training facilities is expected to increase going forward.

Looking ahead, we expect FY16 earnings to recover on higher revenue recognition as Starburst begins fabrication and installation works on its contracts won in 1H15, from 4Q15 onwards. Also, its new factory (capacity doubled) enables it to undertake more and larger projects at the same time. Hence, beyond FY16, we expect Starburst to take on projects, each of bigger contract value, which helps to reduce earnings volatility.

Reiterate BUY; FV unchanged at S$0.39

With weak 3Q15 results, we now forecast for a slightly loss-making FY15 but keep FY16F PATMI largely unchanged as we expect earnings to recover. Reiterate BUY with FV of S$0.39 (10x blended FY16F PER: 35% discount to peers’ average).

Source: OCBC Research - 16 Nov 2015