SINGAPORE (June 30): DBS Group Research is maintaining its “buy” call on Starburst Holdings with a lower target price of 56 cents as the stock is a proxy to higher defence spending in Southeast Asia and the Middle East.

In a report out today, DBS analyst Ling Lee Keng says a delay in the award of contracts has led Starburst reporting a net loss of $0.5 million for 1Q15.

Ling sees another set of weak results in 2Q15, as contract flow in 1H15 has been slow. However, Ling expects 2H15 to be better, with the recent signing of LOI for a $16.1 million contract.

“We have pushed back the award of contracts originally slated for FY15 to FY16, and those for FY16 to FY17/FY18,” writes Ling.

Based on progressive booking method, Ling expects Starburst to book revenue of $22 million for FY15F, which is similar to its FY13 level, before the ramp-up in FY14.

“We see a strong recovery in FY16 and FY17, with the expected award of a few big contracts in the range of $20 million to $60 million.”

Nevertheless, Starburst is a beneficiary of higher defence spending in Southeast Asia and the Middle East.

Southeast Asia is actively upgrading and modernising facilities, partly to protect critical infrastructure whereas in the Middle East, the implementation of compulsory military services is propelling demand for new shooting ranges in Middle East.

“Our target price of $0.56 is based on 12x FY16 PE, which is pegged to a 40% discount to peers’ average of 20x forward PE,” says Ling.

Key risks include lumpy project wins and customer concentration as Starburst’s contracts are mainly from government agencies.

Starburst remains untraded today at 48 cents.