Starburst Holdings Limited

Starburst Holdings Limited ("Starburst" or the "Company") is offering 50m shares at $0.31 each for its initial public offering. 48m shares will be via placement and 2m shares will be via public offer. The IPO will close on 8 July 2014 at 12pm. The prospectus is here. The market cap post IPO will be around S$77.5m

Principal Activities

The Company is a Singapore-based engineering group specializing in the design and engineering of firearms training facilities with a 15 years track record. The facilities are used by law enforcement, securities agencies and civil authorities in Southeast Asia and the Middle East. Those who served the Army like you and me should know their facilities quite well!?!?

The Company intends to focus on larger projects with bigger complexity, grow its brand and marketing in Middle East, grow its maintenance service business income (recurring income).

Use of Proceeds

At least in this case, the proceeds are properly utilized in acquiring land and buildings and for general working purposes rather than to pay for the advisers as professional fees

Financials

The EPS registered a strong growth of more than 34% over the prior year. Based on the post-invitation 250m shares, the EPS for FY2013 is 3.49 Singapore cents and that translate into a historical PER of 8.8x. The order book as of the prospectus is around S$45.8m.

Proposed Dividends

The Company intends to pay out at least 20% of its profit after tax for the financial year ending 31 Dec 2014 as dividends. Assuming EPS remains the same (for conservative reasons), 

DPS = EPS of 3.49 cents x 20% = 0.698 cents and that translate into a yield of 2.25%.

Shareholders

The two founders continue to hold 80% of the Company with the balance small float held with the public. According to my source, the placement is significantly subscribed by Alan Wang from Asdew (not sure if true or not, we shall see next week when the IPO results is out). 

It is easy to place out the shares to strong hands. If the above information is true, then we are in for a rolling good time. The IPO should perform very well post listing date.

It is good to see the Company being transparent about the pay of its executives. Both of them draw $360,000 each year with additional 3 months bonus. There will be a profit sharing bonus as well to align the interest should the company do well.

What I like about Starburst

• An established player in a niche business where the barriers to entry is high for competitors due to the specialized knowledge involved.
• Good paymasters. Given this is a very controlled sector, the clients are usually government and law enforcement agencies. The risk of default is probably low.
• Proprietary trademarked anti-ricochet ballistic protection materials helped improves margins and extend the lives of the facilities.
• The era in which we live in post 9-11 has always been one focused on improving security. If you are a frequent traveler, you will know what a hassle it is to clear the security customs, especially in certain countries. This probably means the demand for and the willingness to spend on security related budget will continue to increase.
• The two founders are not selling a single share at the IPO and continue to be strongly vested in the business
• SEA and Middle East (unfortunately) seemed to be in the sweet spot for the business.

My Concerns

• The reverse is true for niche business. Any loss of major contracts will be detrimental to the firm's prospect and business.
• The world becoming more peaceful and the spending on security reduces? (unlikely) 
• The two founders "fell out" after the IPO. This happens to some of the companies once they become successful. Given that both founders are 56 and 50 respectively, another concern will be the succession plans.
• This is a small cap company with tiny revenue and the small public float means liquidity is limited.

My fair value

Assuming EPS grow by 25% (i am purely guessing) 3.49 x 1.25 = 4.36 and a fair value range of 8-10x, the price target will be around 35c to 44c. 

My ratings

Given that this is a small cap company going for IPO, i am actually quite surprised to see DBS Bank taking on this assignment. DBS is usually very discerning and selective in their IPO pipeline and they don't usually take on small clients unless they believe the firm have good growth potential (unless the mindset has changed). As such, i view it positively that DBS is the underwriter and backer and i like the fact that they are conducting a public tranche for retail investors like you and me! Thank you DBS. 

The IPO is priced reasonably and i believe the Company does have some growth prospects if it is able to execute its strategy. I understand from sources that the placement is very hot. Given that there is only 2m shares, it will only make sense if you apply for a lot of shares at the ATM and "pray that" they allocate more shares to you. 

I will give it a 3 Chilli ratings since this is the first IPO with public tranche after such a long hiatus! Thank you DBS and HOOT ah.....