SARINE TECHNOLOGIES LTD
U77.SI
Are we there yet?
- Sarine’s 2Q15 core earnings were only at 15%/14% of our/consensus full-year forecast, no thanks to tight credit conditions faced by its customers in India and high rough diamond prices.
- 1H15 earnings were 20%/18% of our/consensus expectation.
- We cut our FY15-17 core EPS forecasts by 10-21%.
- We believe consensus earnings forecast for FY15 remains too high.
- Industry players believe the approach of major diamond supplier DeBeers could turn more flexible given the difficult conditions.
- It may take another quarter before the bottom is hit.
- Earnings contributions from Sarine’s new products will be the litmus test in FY16.
- We keep our Hold call, with a lower target price (S$1.80), still based on a generous 18x CY16 P/E (0.5 s.d. above its 8-year mean).
Sequential growth
- 2Q15 revenue was affected by the lack of credit in India, high rough diamond prices and muted market demand. This resulted in lower processing revenues for Sarine.
- Recurring revenue fell 20% yoy but grew 5% qoq.
- Only six units of its Galaxy family systems were delivered in 2Q15, bringing the installed base of such products to 200.
- Gross profit margin improved yoy to 72.3% with the cessation of amortisation of Galaxy product related legacy acquisition costs.
- Sarine ended 2Q15 with net cash of US$37.4m (no debt).
Still excited over FY16
- Sarine remains confident of its prospects as:
- it still has no meaningful competition, and
- its new products rollout remains on track.
- New products previously mentioned include Sarine Light, Sarine Profile, Galaxy Meteor (for smaller diamonds) and Allegro.
- The next key event is the upcoming DeBeers sight on 24 Aug.
Lower target price
- While we do not dispute the long-term outlook of Sarine, earnings visibility is being clouded by difficult industry conditions beyond its control.
- Sarine has also turned cautious and has cut its 2Q15 DPS to 1.5 UScts versus its previously announced dividend policy of 2.5 UScts payable semi-annually.
- We cut our FY15 DPS assumption to 3.0 UScts and FY16-17 DPS to 4.0 UScts.
- We believe earnings visibility will improve only from 3Q onwards.
- We offset our generous 18x P/E multiple against prudent cuts to our earnings estimates.
William TNG CFA | http://research.itradecimb.com/ CIMB Securities Research 2015-08-11
1.80
Down
2.02
