CIMB Securities 2015-08-11: Sarine Technologies Ltd - 2Q15 Results; Are we there yet? Maintain HOLD.


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: 
    1. it still has no meaningful competition, and 
    2. 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 | CIMB Securities Research 2015-08-11
HOLD Maintain HOLD 1.80 Down 2.02