Shaping its third pillar
- Collaboration with GSI could foreshadow success of Sarine ProfileTM , its third pillar.
- Net profits of USD4-14m pa possible from GSI alone, with potential upside from pipeline deals.
- Maintain BUY & DCF TP of SGD3.07. Expect catalysts from 2H15 recovery & polished-diamond product adoption.
What’s New
- Sarine’s third pillar of growth appears to be shaping up nicely. Gemological Science International (GSI), a leading gem lab in the US, will incorporate Sarine Profile(TM) into its diamond-grading reports.
- Sarine earlier also reported ‘overwhelming’ interest in its Sarine Profile(TM) at the end-May JCK trade show, closing significant deals.
What’s Our View
- Sarine did not disclose terms of its GSI agreement. But based on our back-of-envelope calculations, GSI could potentially contribute USD4-14m pa.
- The more important implication is that with GSI’s adoption of this certification standard, other gem labs or retailers may follow suit.
- We believe that GIA, an existing customer of Sarine’s scanners and planning software and the world’s largest gem lab, may be evaluating such an option.
- GIA grades 3.5-3.7m of polished stones a year and could theoretically add USD26-44m to Sarine’s annual net profits if it becomes a user of Sarine Profile(TM) for certification. This is not yet in our forecasts.
- We think that the market has been caught up in Sarine’s short-term earnings weakness, losing focus of its key investment merit. This is its highly scalable growth from the adoption of its technologies.
- We would watch for a 2H15 earnings recovery for the rough-manufacturing sector and further adoption of Sarine’s polished-diamond products.
- Maintain BUY and DCF TP of SGD3.07 (WACC 9.6%) with higher-than-consensus forecasts.
(Yeak Chee Keong, CFA)
Source: http://www.maybank-ke.com.sg
