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This Share Has More Than Doubled In A Month – Can It Continue Growing?

Over the past month, the Straits Times Index (SGX: ^STI) has been hovering between 3,200 and 3,400 points without having made any big moves. But, that doesn’t mean other shares in the market have not had a shot at glory. In fact, there’s one particular share which has more than doubled since it got listed just slightly more than a month ago.

A small profitable company with a niche

The company in question’s Starburst Holdings Ltd (SGX: 40D). It got listed in July 2014 at a price of S$0.31; today, it’s trading at S$0.66. Judging from its name, it might be hard to tell that Starburst is actually an engineering outfit which focuses on the design and engineering of defence training facilities.

The company’s firearms-training facilities and tactical training mock-ups are utilized by law enforcement, military and security agencies as well as civil authorities in Southeast Asia and the Middle East.

Besides providing the training facilities, the company has also developed anti-ricochet ballistic protection materials for use in those facilities. The products are developed under its Searls trademark and also enables the company to better manage costs and provide customized solutions for customers.

Despite being a small company when compared to another Singapore-based defence-related outfit, Singapore Technologies Engineering Ltd (SGX: S63), Starburst has still managed to clock a 15 year track record under its belt. Singapore Technologies’ defence segment accounted for roughly 38% of its annual revenue of S$6.63 billion in 2013; that’s in stark contrast to the revenue of S$21 million Starburst had earned in the same year.

Nonetheless, Starburst’s work over 15 years has given it an “established track record in the niche business of anti-ricochet ballistic protection systems for firearm shooting ranges and tactical training mock-ups.” It’s also interesting to note that, according to the company’s own profile of itself, it is “able to meet the stringent requirements of government bodies.” In addition, the company’s close ties with other key players in its industry have also enabled it to win deals in Southeast Asia and the Middle East. The latter region is important for Starburst as it accounts for 31% of the company’s revenue.

Starry prospects ahead

There are signs that Starburst could be in the right place at the right time. In addition to its inherent competitive advantages – such as its track record, business relationships, and proprietary technology – the company could also benefit from the recent turmoil happening in the world. Bear in mind though that I’m not saying armed conflicts are a good thing – I’m just stating these developments as a matter of fact.

According to industry analysts, the growth of the Engineering and Construction of Training Facilities (ECTF) industry is correlated to defence spending and the economic performance of a country. With all sorts of international conflicts sprouting across the world – some examples include the conflict between Russia and Ukraine as well as the multilateral argument over national territories in the South China Sea – it’s easy to see how defence spending would likely grow.

Mr. Edward Lim, Chairman of Starburst, also gave his take on the matter recently in the company’s second quarter earnings release on 12 August 2014:

“Undeniably, political volatility, increasing security needs, technological development and the changing nature of modern combat will present opportunities for companies operating in the ECTF industry. We will focus on larger projects with greater complexity and enhance our recurring income stream by undertaking more contracts for the maintenance of firearm shooting ranges and tactical training mock-ups.”

In the first half of 2014, Starburst turned in a splendid set of numbers with revenue growing by 311% year-on-year to S$21.5 million. Its profit meanwhile soared from S$1.4 million a year ago to S$9.0 million. The company had not achieved such growth by going on a borrowing binge either – Starburst ended the first half of the year with a robust balance sheet which had a debt to equity ratio of just 0.18.

Foolish Summary

At its current price, Starburst is valued at 15 times trailing earnings and has no dividend yield to speak of yet.

A huge 113% gain in share price in slightly more than a month might raise some skeptical eyebrows amongst more conservative investors. But there’s also a case to be made that the company’s share price gains are driven in part by its corporate performance.

With that said, can Starburst’s competitive advantages persist in the future and drive its corporate results substantially higher five or 10 years from now? That’s something for each investor to decide individually.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor James Yeo doesn’t own shares in any companies mentioned.