• FY15 a year to forget
• Expects earnings to recover
• Reiterate BUY with S$0.39 FV

FY15 ended with slight loss as expected

FY15 was a year to forget for Starburst Holdings Limited’s (Starburst), as revenue dropped 59.5% to S$15.9m due to lower contribution from fabrication and installation works on completion of a firearm shooting range project and a tactical training mock-up project, both in Southeast Asia (SEA) and the Middle East (ME).

FY15 gross profit plunged 82.4% to S$3.9m due to delay in handing over of project infrastructure by the main contractor to Starburst and higher than expected costs for a project that saw changes to requirements.

Also, Starburst recorded a 94.8% jump in depreciation expenses, mainly due to purchase of new leasehold property during the year. Hence, FY15 operating expenses fell by a slower rate of 21.0%. Consequently, Starburst reported a net loss of S$1.7m in FY15 compared to net profit of S$13.2m in FY14.

Still positive on rebound in FY16 and beyond

Starburst’s revenue continues to be driven by SEA and ME, which formed 71.6% and 28.4% of FY15 revenue, respectively. Management noted that they have yet to see any cuts in defence spending budgets in the ME despite the oil rout.

We believe the increasing threat of terrorism may likely even see budgets prioritized for defence related projects. Within SEA, the recent bombing in Jakarta (Indonesia) as well as the threat of terrorist attacks in and around Kuala Lumpur (Malaysia) will likely escalate the need for government to spend on defence training facilities to beef up their security forces to handle these threats/attacks.

For FY16, we expect fabrication and installation works for some contracts signed in FY15 to contribute meaningfully in FY16. We also forecast for its recurring maintenance contracts to contribute ~S$6.0m in revenue annually. We think Starburst will see better days ahead, as growth will be driven by the expected growth in defence spending in both SEA and ME.

Keeping forecasts unchanged

Keeping FY16 PATMI forecast largely unchanged on expectation of earnings recovery, we reiterate BUY with FV of S$0.39 (10x blended FY16F PER). We also expect FY16F dividend to remain the same as FY15’s S$0.01, translating to a decent yield of 3.3%.

Source: OCBC Research - 1 Mar 2016