Starburst Holdings

[LocalOptimal]

Thanks bear.

Assuming the management announces all contract wins, the contracts announced since IPO have not been exciting. A rough calculation leads me to a contribution of 11m to CY15 from the announced contracts.

However, we do not have visibility over previous contracts that have tangible effects on CY15. Based on previous reports, I did read about order books being large for CY14 and CY15.

[bear]

Results out.

If I do simple math and extract the 4th quarter results,

Revenue is around 10m, this is in line with my expectations.

Profit is arnd 2.5m. It is lower than 3Q after accounting for the IPO expense in 3Q. This is where I expect a higher GPM.

1.2 cents dividend declared.

Seems like as a FY, results look good, but most of it came from Q1, afterwhich the profit remained around 2m.

EDIT: Just realised it's a more than 50% decline YoY for Q4.

Yes you are correct,Net Profit for 1H14 is S$10.9million,whereas for 2H14 is a sharp decline to S$2.26million(if remove the charges for one-off IPO is S$3.46million).It seems that they have achieved unusual strong performance back in Q4 FY2013&Q1 FY2014(realized profits around one year ago).

That do seems like a potential bad news,especially in recent months they have not yet announced any big contract wins.

EDIT:To address your question on the estimated values of ongoing/previous contracts,I actually saved a pdf of the DBS report based on the link that you shared in September 2014.

Here's the extract that may indicate roughly the values of the ongoing contracts for the upcoming 2 quarters.
"Orderbook. As at June 2014, the company’s order book
stood at S$45.8m; out of which S$19.7m is derived from
firearm shooting range and tactical training mock-up business
segments and will be translated into revenue over the next
year. The remaining which comes from maintenance services
and others segment would translate into revenues over the
next one to 19 years."

I fear that the report about the order books being large for FY2014 and FY2015 is the "Potential supply,fabrication and installation contract wins" based on the DBS analysts projection on the upcoming 6-12 months when they generate the report in September 2014,which they "expect a total of S$110millions"

"Healthy bidding pipeline underpins positive growth outlook.
We understand from industry sources that opportunities are
abound in the Middle East for the establishment of new
facilities. Hence, we estimate that Starburst could gain some
S$20-30m contracts in this region. In the Southeast Asia
market, we estimate that Starburst could gain another S$80-
90m worth of contracts for both upgrading and new
facilities. All in, we expect a total of S$110m in new contract
wins in 4Q14/2015."

[LocalOptimal]

I looked at the report again: Among the 39m of revenue in FY14, 37m comes from these shooting ranges and tactical mockups, and only 2m comes from maintenance contracts.

That means of the 19.7m order book (at June 14) for tactical mockups and ranges, a large portion of the revenue has already been realized at 2H14 (2H14 revenue stands around 18m and very little is from maintenance).

The remaining 2-3m for FY15, coupled with a consistent 2m/yr maintenance revenue, and a rough addition from the contracts announced, it equates to less than 10m of revenue for 1H15. This is indeed worrying. Also, this also could mean the management had over-estimated its ability to continue to win big contracts after 4Q13 and 1Q14 and called for an IPO to raise funds to expand its office and operations.

Note the above are based on the assumption that all contracts won since IPO had been announced.

[btws548]

I think at current valuations based on full year eps of around 11, valuations seem fair.

With regards to their contracts, the management has stated repeated that theirs are primarily project-based so revenues will be lumpy in nature and they are trying to increase their % of revenue from maintenance revenue. From the S$7.14m maintenance contract announced on the same day (perfect timing haha!), this will contribute S$1.4m per year from FY 2015, which constitutes 56% of maintenance revenue from FY 2014. Total tevenue for FY 2015 is already ard 15m based on the deals announced which is already ard 38% of FY 2014's revenue.

My concern is whether they will be able to manage their costs as they win more deals. While revenue has increased by 87%, project costs has increased by 104%. This will affect margins as revenue increase.

Talking about margins, looking at the breakdown by business segments, it is clear why management wants to get more maintenance contracts. Net profit margin can be up to 80% (though noted the small sample size so may not be representative of future deals) while net profit margin for the firearms and tactical training are around 40-50%. So besides the recurrent income, the margin is also higher. Do correct me if I'm wrong since my calculations are rather simplistic.

I think investors here should be patient and see whether more deals will be announced down the road. Hopefully, more deals from the Middle East will be announced since that's supposedly their area of growth, though perhaps with the oil slump the defense budgets for these OPEC nations may be affected. I am cautiously optimistic given the 129% increase in revenue from Middle East from FY 13 to FY 14 (though again from a low base).

[LocalOptimal]

I think at current valuations based on full year eps of around 11, valuations seem fair.

With regards to their contracts, the management has stated repeated that theirs are primarily project-based so revenues will be lumpy in nature and they are trying to increase their % of revenue from maintenance revenue. From the S$7.14m maintenance contract announced on the same day (perfect timing haha!), this will contribute S$1.4m per year from FY 2015, which constitutes 56% of maintenance revenue from FY 2014. Total tevenue for FY 2015 is already ard 15m based on the deals announced which is already ard 38% of FY 2014's revenue.

My concern is whether they will be able to manage their costs as they win more deals. While revenue has increased by 87%, project costs has increased by 104%. This will affect margins as revenue increase.

Talking about margins, looking at the breakdown by business segments, it is clear why management wants to get more maintenance contracts. Net profit margin can be up to 80% (though noted the small sample size so may not be representative of future deals) while net profit margin for the firearms and tactical training are around 40-50%. So besides the recurrent income, the margin is also higher. Do correct me if I'm wrong since my calculations are rather simplistic.

I think investors here should be patient and see whether more deals will be announced down the road. Hopefully, more deals from the Middle East will be announced since that's supposedly their area of growth, though perhaps with the oil slump the defense budgets for these OPEC nations may be affected. I am cautiously optimistic given the 129% increase in revenue from Middle East from FY 13 to FY 14 (though again from a low base).

Hi btws548,

I agree that profits and revenues are definitely lumpy for such businesses. I used to be cautiously optimistic like you, but as I raised during my previous posts, there are several concerns for investors to take note.

I estimate FY15's EPS to be significantly lower than FY14, and this is made worse by the higher costs of running extra project offices, as seen from the increase in employee benefits. My estimate is because they have not announced big contract wins since IPO and its order book status at June 2014, and there is probably not much time to lock in contracts that will generate revenue for FY15. I certainly hope they did not over-estimate their ability to generate results like 1H14 and thus over-expanded. I also am not comfortable with the way they presented their results, as they chose not to show QoQ results, in contrast to how they presented Q2 and Q3 results. From what the management said, they are still trying to secure revenue. Nothing was mentioned about huge order books that reflects any confidence in FY15 EPS.

I believe investors bought into Starburst to as much as $0.79 because they believe Starburst will deliver results similar to what we have seen in 1Q14. This has not happened and I estimate it will not happen in FY15 as well. If we use the last 3 quarters' performances as a proxy, EPS will be around 3.3 cents.

I have divested and cashed out a significant portion of my holdings, not because I don't believe it has a moat or growth potential, but I'd like to wait for a better time to enter as I believe more investors will cash out upon seeing FY15 results. It will also give me some time to monitor the business from the sidelines if the growth story is still intact.

[btws548]

I think at current valuations based on full year eps of around 11, valuations seem fair.

With regards to their contracts, the management has stated repeated that theirs are primarily project-based so revenues will be lumpy in nature and they are trying to increase their % of revenue from maintenance revenue. From the S$7.14m maintenance contract announced on the same day (perfect timing haha!), this will contribute S$1.4m per year from FY 2015, which constitutes 56% of maintenance revenue from FY 2014. Total tevenue for FY 2015 is already ard 15m based on the deals announced which is already ard 38% of FY 2014's revenue.

My concern is whether they will be able to manage their costs as they win more deals. While revenue has increased by 87%, project costs has increased by 104%. This will affect margins as revenue increase.

Talking about margins, looking at the breakdown by business segments, it is clear why management wants to get more maintenance contracts. Net profit margin can be up to 80% (though noted the small sample size so may not be representative of future deals) while net profit margin for the firearms and tactical training are around 40-50%. So besides the recurrent income, the margin is also higher. Do correct me if I'm wrong since my calculations are rather simplistic.

I think investors here should be patient and see whether more deals will be announced down the road. Hopefully, more deals from the Middle East will be announced since that's supposedly their area of growth, though perhaps with the oil slump the defense budgets for these OPEC nations may be affected. I am cautiously optimistic given the 129% increase in revenue from Middle East from FY 13 to FY 14 (though again from a low base).

Hi btws548,

I agree that profits and revenues are definitely lumpy for such businesses. I used to be cautiously optimistic like you, but as I raised during my previous posts, there are several concerns for investors to take note.

I estimate FY15's EPS to be significantly lower than FY14, and this is made worse by the higher costs of running extra project offices, as seen from the increase in employee benefits. My estimate is because they have not announced big contract wins since IPO and its order book status at June 2014, and there is probably not much time to lock in contracts that will generate revenue for FY15. I certainly hope they did not over-estimate their ability to generate results like 1H14 and thus over-expanded. I also am not comfortable with the way they presented their results, as they chose not to show QoQ results, in contrast to how they presented Q2 and Q3 results. From what the management said, they are still trying to secure revenue. Nothing was mentioned about huge order books that reflects any confidence in FY15 EPS.

I believe investors bought into Starburst to as much as $0.79 because they believe Starburst will deliver results similar to what we have seen in 1Q14. This has not happened and I estimate it will not happen in FY15 as well. If we use the last 3 quarters' performances as a proxy, EPS will be around 3.3 cents.

I have divested and cashed out a significant portion of my holdings, not because I don't believe it has a moat or growth potential, but I'd like to wait for a better time to enter as I believe more investors will cash out upon seeing FY15 results. It will also give me some time to monitor the business from the sidelines if the growth story is still intact.

Hi LocalOptimal,

Your points are valid. The lack of visibility of their order books, lack of significant sizable contract announced, inability to scale their cost and change in reporting format are valid concerns. Therefore, while I am cautiously optimistic, this stock is not part of my core. Based on the past entries from other VBs, it seems that the market expectation of Starburst's performance was not met. People were looking at EPS 6-8 cents for FY 14 when it was actually around 5 cents.

As for those who vested at 79 cents, that's the "beauty" of the IPO at work. Those who were vested at IPO price may want to take some profit off the table like yourself but those who vested at 79 cents will be cursing and swearing. As for me, I don't believe in buying IPO after my treacherous experience with HPH Trust...so I tend not to participate which resulted in a miss for me...

If in FY 15 EPS falls to 3.3 cents like what you forecast, and if I have a better alternative for my minor position, I will exit and buy something else. If not, I will hold. I will like to see how this management team grows their business. Their history of being a listed company is too short so we should wait and see. At current valuations, I will not be adding more or cutting my position.

Vested but non-core position

[bear]

AR out slightly more than one week ago.

http://infopub.sgx.com/FileOpen/Starburs...ent&FileID=

From the Managing Director's message,it seems that they are optimistic about the growth potential in the Middle Eastern market,with their administrative and employees costs increasing,reflecting the additional costs of the Middle Eastern operations.
However,as mentioned earlier,there has yet to be any announcement regarding big contract wins from that region(unlike last financial year),hence it is highly likely that EPS for FY2015 will be weaker(I hope I am wrong though).

Should the price falls due to weak EPS in FY2015,I do hope the Chairman and Managing director themselves will increase their stakes in the company to signal confidence and their beliefs in the potential of Middle Eastern Market for the next few years.

I also noted the key executives' remuneration in the Middle Eastern office,Mr. Samer Sidani and Mr. Andrew Popplewell.
I wonder why is the "other benefits" occupying such as significant percentage of their total remuneration,at 21% compared to the Mr. Edward and Mr. Yap 1%.Wouldn't it be better to increase the remuneration tied to the revenue of the regions(bonus%) so that they can have greater incentives to ensure that bigger contracts be clinched?

Will need to wait for results release next few quarters before further action.

(Vested but will not be adding more)

[brattzz]

Good Question on the K-Exe remuneration,

Maybe they are just responsible for the project executions, not market sales.. just a thought, i could be wrong!

[Happymeowmeow]

Starburst sinks into the red in 1Q with $0.5 million net losses due to lower percentage of work completed

By Gho Chee Yuan / theedgemarkets.com | May 12, 2015 : 7:27 PM MYT
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SINGAPORE (May 12): Starburst Holdings, the specialist in modern firearms-training facilities, posted a net loss of $0.5 million for 1Q15 as compared to a net profit of $6.1 million recorded in the same period last year.

Revenue for the quarter came in at $2.9 million, 78.5% lower against $13.5 million last year.

Starburst explained that its revenue is recognised on a percentage-of-completion method.

Typically, a larger proportion of revenue is recognised in the fabrication work phase as opposed to the installation work phase.

"There was a larger proportion of revenue recognised in the fabrication work phase in 1Q2014, as compared to the installation work phase in 1Q2015, which contributed to the decrease in revenue this quarter," it added.

During the quarter, the group secured a number of projects, one of which was the five-year maintenance service contract for security and detention facilities in Southeast Asia worth $7.1 million that will provide a stream of recurring income for Starburst.

"In addition, we also secured a S$11.8 million contract for the supply, fabrication, delivery and warranty of facade steelworks for the Marina One project in Singapore,” said Jonathan Yap, Managing Director of Starburst.

"Another contract win for us was the S$2.5 million project secured in February 2015 to undertake ballistic protection works to a firearms-training facility in the Middle-East," said Yap, adding these contracts will provide greater revenue visibility.

On outlook, Edward Lim Chin Wah, Executive Chairman of Starburst, anticipated the group could secure additional new contracts in the coming quarters.

To facilitate this, Starburst acquired a leasehold property in Tuas, Singapore, for $22.4 million, in the quarter.

According to Lim, consolidating its operations into a bigger premise under a single roof will provide them with opportunity to achieve higher overall productivity as well as increase its fabrication efficiency and capacity to simultaneously undertake larger projects.

Starburst closed 0.88% lower at 56.5 cents, giving it a market capitalisation of $142.5 million.

[LocalOptimal]

As mentioned before, this year's EPS is not likely to be pleasant.

The growth story has sort of halted. All the projected contract wins from Dubai is nowhere to be seen.

This counter's near-term performance is easy to project, as they seem to announce all their contract wins. The question is, on a long-term projection, can they re-ignite their growth story?

(Divested after last Q and will not be adding unless outlook changes)