Sarine Technologies - Maybank Kim Eng 2016-10-12: 3Q16 not likely to disappoint

Sarine Technologies - Maybank Kim Eng 2016-10-12: 3Q16 not likely to disappoint SARINE TECHNOLOGIES LTD U77.SI

Sarine Technologies - 3Q16 not likely to disappoint


3Q16 unlikely to disappoint; maintain BUY 

  • Stock has drifted down by 9% over the past month, possibly on fears that its recovery may not be sustained, like last year. 
  • We believe that 3Q16 is unlikely to disappoint and expect USD4-6m in net profit. Our confidence stems from: 
    1. decent rough diamond sales in De Beers’ Sight 7 and Sight 8, 
    2. supportive India diamond trade data and 
    3. expectation of seasonally higher manufacturing activities in India before Diwali in Oct.
  • But we are moderating our expectations for the pace of growth of its polished diamond segment and have cut FY16-18E EPS by 3-15%. 
  • Our DCF-TP (WACC 13.3%, g 2%) dips from SGD2.07 to SGD2.01. Maintain BUY.


De Beers’s Sight 8 decent; supportive 

  • India trade De Beers’ Sight 8 ended in 29 Sep with USD485m of rough diamond sales (2016 Sight 7: US639m, 2015 Sight 8: USD184m). Sight 7 was strong while Sight 8 is a seasonally smaller sight as it is near Diwali and close to Sight 7. 
  • Based on Rapaport news, India’s diamond manufacturing activities picked up before the break for Diwali and while we found out from our recent conversation with management that they saw record usage of GalaxyTM systems post 2Q16. This is further supported by India’s diamond trade data.


Moderating polished segment growth pace 

  • After analysing the growth pace of its polished diamond segments over the past few quarters, we believe that our previous assumptions were overly optimistic and have moderated our expectations. This does not alter our view for an eventual exponential growth but the path towards that critical turning point may be flatter than what we previously assumed. 
  • We now expect polished diamond segment to account for 4/5/7% of revenue in FY16/17/18E, vs 6/9/13% previously.


Sarine’s products increasingly relevant 

  • We maintain BUY on Sarine as we see increasing relevance of its products in an environment where 
    1. manufacturers need to rely more on technologies to improve yields and 
    2. retailers need to differentiate from generic propositions. 
  • Our DCF discount rate of 13.3% WACC is conservative as we have factored in a higher cost of equity of 13.3% given its earnings volatility in FY15 to date




Yeak Chee Keong CFA Maybank Kim Eng | http://www.maybank-ke.com.sg/ 2016-10-12
Maybank Kim Eng SGX Stock Analyst Report BUY Maintain BUY 2.01 Down 2.070



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