Starburst Holdings

[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