Sarine Technologies (SARINE SP) - Maybank Kim Eng 2016-11-14: New Drivers May Soon Emerge

Sarine Technologies (SARINE SP) - Maybank Kim Eng 2016-11-14: New Drivers May Soon Emerge SARINE TECHNOLOGIES LTD U77.SI

Sarine Technologies (SARINE SP) - New Drivers May Soon Emerge


3Q16 at low-end of expectations. Still a BUY 

  • 3Q16 net profit of USD4.0m came in at the low end of our expected USD4-6m highlighted in our last report. We deem this as a slight miss.
  • Still, 3Q16 is a strong reversal from the USD1.4m loss in 3Q15 while the 34% QoQ dip is largely due to a high base in our view. But margins were weaker than our forecasts because of product mixes and we cut FY16- 18E by 7-12% to adjust for that. This brings our DCF-based TP down from SGD2.01 to SGD1.97. Maintain BUY.


Broke last quarter’s record 

  • Galaxy sales With 22 Galaxy-related systems delivered this quarter (2Q16: 20, 3Q15: 1), Sarine broke its last record of 20 units in 2Q16 and brought total installed base to 275 units. 
  • Recurring revenue accounted for 40% of its 9M16 revenue. However, we note that the 22 units consist of 12 Meteors and seven Solaris which have a lower upfront fee than a Galaxy, therefore there was weaker lift to revenue. 
  • Management also said that there were some uncertainties in the midstream in 3Q16, which dissipated only at the tail end of the quarter after a positive Hong Kong Jewellery show.


New invention, new drivers? 

  • A key highlight of the analyst call however was about their new products that automatically evaluate and grade two key polished diamond parameters: Clarity and Colour. Clarity is currently evaluated almost manually and subjectively. 
  • We believe that eventual contributions could be on a similar scale as its Galaxy products. But we think that given the slower-than-expected adoption of its Sarine Profile/Light/Loupe, investors are likely to discount this potential until greater earnings visibility. 
  • Sarine expects some contribution as early as in FY17E but we have not factored it in.


4Q could at least match 3Q 

  • We also note a very positive stance in their outlook statements which usually comes with some cautionary notes, but these were largely absent in their latest statements. 
  • Our analysis in our last report also suggest robust industry conditions and therefore although 4Q is traditionally a weaker quarter due to the Diwali holidays in India, we think that it may match 3Q16 performance or better.


Swing Factors


Upside

  • Further penetration of its GalaxyTM family of machines, especially the SolarisTM that has only achieved 25% penetration while the MeteorTM is newly launched.
  • Sarine LightTM, LoupeTM and ProfileTM become widely adopted as an industry standard by retailers and gemlabs in measuring and grading polished diamonds.
  • Strong contributions and adoption of new automated Clarity evaluation and grading technology as well as new advanced automated Colour classification technology.

Downside

  • Margin squeeze on its rough manufacturer customers due to mismatch in rough diamond prices and polished diamond prices leading to tightened liquidity.
  • Earnings recovery fizzles off as customers hold back on capex and manufacturing activities for fear of weakening sales environment.
  • Emergence of competing technologies.



Yeak Chee Keong CFA Maybank Kim Eng | http://www.maybank-ke.com.sg/ 2016-11-14
Maybank Kim Eng SGX Stock Analyst Report BUY Maintain BUY 1.97 Down 2.010




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