Starburst announced a proposed renounceable non-underwritten rights issue of up to 62.5m warrants on the basis of one warrant for every four existing ordinary shares, at an issue price of S$0.01/warrant, subject to approvals from SGX and shareholders. Each warrant has the right to subscribe for one new ordinary share at an exercise price of S$0.25 within the exercise period and will expire five years from the date of issue.

The two largest shareholders, who in aggregate hold 80.1% stake in Starburst, have undertaken to subscribe for their respective entitlements (i.e. ~50.0m warrants). Thereafter, any proceeds raised from the warrants being exercised will be used mainly for: 1) repayment of borrowings, 2) pursuit of business opportunities, and 3) general working capital purposes.

In our view, while we think Starburst do not need such funding now, we believe the positive outlook on the growth in defense projects in both the Middle East and Southeast Asia may see such needs arise over the next few years, especially to fund its working capital needs. As we continue to expect earnings recovery from FY16 onwards, reiterate BUY with the same FV of S$0.39.

Source: OCBC Research - 8 Mar 2016