As policy makers plan a country’s budget for the year, cuts and increases to various sectors are common as the government address the country’s changing needs. However, it is notable that the amount of financial resources allocated to defence spending almost never decreases.

Early this year, Singapore’s Finance Minister announced during Budget 2017, a permanent two percent downward adjustment to the budget caps of all Ministries and Organs of State with effect from FY17. However, ministries serving security needs are significantly expanding their services and will see the adjustments phased in over FY17 and FY18.

Despite the prudent approach this year, the total expenditure of the Ministry of Defence is projected to be $14.2 billion, an increase of $367.81 million or 2.7 percent from the revised FY16 expenditure.

Since our previous coverage in March 2016, Starburst Holdings’ (Starburst) shares have advanced $0.06, or approximately 18.8 percent, to $0.38 as at 31 July 2017. Although Starburst did not receive much love from investors last year, those who had patience were duly rewarded when the group’s share price advance began in March this year.

The Business

Starburst is a Singapore-based engineering group that designs, fabricates, installs and maintains anti-ricochet ballistic protection systems for firearm shooting ranges and tactical training mock-ups.

With the strength of its services founded on its proprietary Starburst Engineering Anti Ricochet Lining System (Searls), the group’s products are mainly used by law enforcement, military and security agencies as well as civil authorities in Southeast Asia and the Middle East.

In addition, Starburst offers complete service and maintenance programmes to ensure that the completed firearm shooting ranges and tactical training mock-ups are kept in optimal operating conditions.

Returning To The Black

(Source: Shares Investment)

(Source: Shares Investment)

In May this year, Starburst’s 1Q17 results saw the highest quarterly earnings since 4Q14 and also the first profitable quarter since 4Q15.

The stronger performance was attributed to better management of project and production costs coupled with higher margin shooting ranges projects secured, which led to a 32 percentage point improvement in gross profit margin to 55.8 percent.

While the net profit of $0.4 million for 1Q17 is far from impressive, it is the group’s first step back into the black. Despite recording losses in the past two years, the group maintains a relatively stable financial position, having a cash pile of $12 million against total liabilities of $17.3 million.

Strong Management Interest

Currently, Starburst has a small float of only 19.2 percent, and the two largest shareholders of the group are the Chairman Edward Lim Chin Wah and Managing Director Yap Tin Foo each holding 38 percent of the total outstanding shares.

The group renewed the latest share buyback mandate on 27 April 2017 and has since bought back a total of 4.3 million shares or 1.7 percent of the total outstanding shares. The share buyback mandate allows the group to purchase up to five percent of its own shares, from the resolution passed by shareholders, via a market acquisition at a price which is not more than five percent above the average closing market price of the shares over the last five market days.

We view both the strong management interest and the recent share buybacks positively as the former aligns the management’s interests with those of shareholders while the latter will help boosts earnings per share for shareholders.

Growing Defence Spending

image 1Driven by heightened tensions in the region, especially in the South China Sea and Korean peninsula, the total defence spending in Southeast Asia is estimated to reach US$533 billion (S$725 billion) per year by the early 2020s.

Further up North, China’s defence budget this year will increase by around seven percent over US$147 billion last year. As the fastest growing military power in Asia, its defence budget is closely watched across the globe, especially by neighbouring countries which have a territorial dispute with Beijing.

More Opportunities Ahead

In October last year, Singapore and Australia signed the first set of agreements under the Comprehensive Strategic Partnership which includes the joint development of new training facilities, such as urban live-firing facilities and combined arms weapon ranges, in Australia. Under the agreement, Singapore will commit AUD2.25 billion ($2.44 billion) on developing military facilities in Australia over the next 25 years.

Back home in Singapore, the Singapore Armed Forces’ (SAF) western Singapore Armed Forces Training Institute (SAFTI) training area will be revamped into a new urban warfare training ground, SAFTI City over a decade at a cost of about $900 million. The development will span 88 hectares and comprise two sectors of extensive road networks and more than 200 buildings.

The development could not be timelier for Starburst as the group’s new factory, which was fully operational last year, boasting three times the size of the old factory and giving it the capacity to take on fabrication works of larger scale.

image 2Having been previously contracted for the SAF’s Multi-Mission Range Complex, Starburst has already proven its capabilities through the facility which significantly reduced the time required for such training activities by up to 60 percent. As such, both the joint development in Australia and Singapore’s SAFTI City present much opportunity for Starburst.

While we view the developments as a positive sign for Starburst, the upside potential for the group’s shares would depend largely on its ability to secure these works.