Maybank Kim Eng 2015-08-11: Sarine Technologies - 2Q15 Missed. May take longer to normalise. Maintain BUY.


May take longer to normalise 

  • 2Q15 missed. Interim DPS cut to USD 1.5 cts vs last year’s USD 2.0 cts and 1.0 cts special. Cut FY15-17E EPS by 14-46%. 
  • Thesis for strong earnings growth from eventual adoption of game-changing technologies still intact. 
  • Maintain BUY with DCF TP of SGD2.82 (from SGD3.07) as we roll forward to FY16E, and higher discount rate. 

Sequential recovery weaker than expected 

  • 2Q15 net profit of USD2.7m (-68.7% YoY, +207.6% QoQ) was below our expectation of USD4-5m. 1H15 net profit of USD3.6m (-79.9% YoY) formed only 14% of our FY15E. 
  • The weaker-than-expected recovery was due to persistent negative industry conditions: 
    1. high rough diamond prices vs polished prices, 
    2. excess inventory, 
    3. mixed consumer demand, and 
    4. limited credit availability for Indian manufacturers. 
  • Six GalaxyTM machines were sold in 2Q15 (1Q15: 5, 2Q14: 19). 
  • Recurring revenue formed half of total sales. 
  • Interim DPS cut to USD 1.5 cts, vs 2Q14’s USD 2.0 cts plus 1.0 cts special and its fixed policy of USD 2.5 cts/half-year. 

But technology adoption thesis still intact 

  • While we believe the earnings bottom had passed in 1Q15, we now see sales normalising in 1Q16 instead of 2H15. 
  • As a consequence, we cut FY15/16/17E EPS by 46/17/14%. 
  • But with pent-up demand and higher installed Galaxy base, we forecast FY16E earnings will easily surpass FY14’s USD27.2m as it emerges from the short-term industry blip. 
  • We remain confident that an eventual adoption of its game-changing technologies would lead to strong earnings growth, which is still the stock’s key investment thesis. 
  • Management thinks that DeBeers is softening its pricing stance and this could be the tipping point of a stronger industry recovery. 
  • Our DCF TP is cut from SGD3.07 to SGD2.82, as we roll forward to FY16E. 
  • We also used a higher WACC discount rate of 11.0% vs 9.6% previously on higher Beta given its increased volatility. This is partly offset by higher USD/SGD. 
  • Maintain BUY.

Yeak Chee Keong CFA | Maybank KE 2015-08-11
BUY Maintain BUY 2.82 Down 3.07