Sarine Technologies Ltd - Possible Headwinds
- 1Q17 net profit was below our expectations at 10% of our and consensus’ FY17 estimates.
- Business was hit by competition from service providers in India that violated Sarine’s copyrights and patent protection.
- Making progress in the polished diamond segment with its Sarine Profile offering.
- Sarine is monitoring industry conditions as sales of rough diamonds in 1Q17 were higher than 1Q16. Concern over possible supply/demand imbalance in the industry.
- Maintain Hold, with unchanged TP of S$1.96 (15.3x CY18F P/E, 9 year average).
1Q17 results below expectations
- 1Q17 net profit at 10% of our and Bloomberg consensus’ FY17 forecasts was below expectations. The miss came mainly from the sales product mix and higher-than-expected operating expenses.
- 17 units of the Galaxy family systems were delivered in 1Q17. This brings the installed base of the Galaxy family of systems to 316 as at end-Mar 2017. Of the 17 units, 11 were Meteor machines, five were Solaris machines and one was a Galaxy System.
- Recurring revenue accounted for 42% of the group’s turnover.
Balance sheet remains healthy
- Its balance sheet remains strong with net cash of US$40.9m. Sarine Tech does not have any bank borrowings. In 1Q17, the company generated US$4.6m in cash from operations and free cashflow of US$2.8m. Cash and short-term investments made up 59.1% of its current assets in 1Q17.
- While there are no significant polished diamond pricing or inventory issues at this point in time, Sarine highlighted that it was monitoring the possibility of an imbalance developing in the industry.
- Sarine noted that sales of rough diamonds in 1Q17 were higher than 1Q16. This could lead to an oversupply of rough stones into the diamond manufacturing chain which could lead to a repeat of the unpleasant industry conditions in FY15, in our view.
Polished diamond business continues to make inroads
- Its digital sales tool, Sarine Profile, made further inroads during the quarter with new customer additions.
- Sarine is targeting to launch a new technology in 3Q17F to certify the clarity and colour of diamonds. Based on industry data, Sarine believes that the diamond grading market could be worth US$500m annually and that its new technologies, if commercialised in 3Q17F, could expand this market to US$750m annually.
- Penciling in higher expenses for FY17F leads to a 15.2% decline in net profit forecast.
- Our TP remain at S$1.96, still based on a 15.3x CY18F P/E multiple, its 9-year average.
- We keep our Hold call as we await better earnings contribution from the polished diamond business which contributed 2% to overall revenue in 1Q17.
- Key risk is deterioration in global economic conditions.
- Re-rating catalyst is a better-than-expected profit contribution from its polished diamond business.