Sarine Tech - CIMB Research 2015-10-06: Warns of 3Q loss

SARINE TECHNOLOGIES LTD U77.SI

Sarine Tech - Warns of 3Q loss

Warns of operating loss of US$1.5m in 3Q15. Expects subdued 4Q15 due to Diwali holiday in India.
FY15 a write-off year. Expects pick-up in FY16 as new products will be launched in 4Q15.
Expects further improvement in industry conditions in FY16.
Risk of no dividend or a lower dividend when FY15 results are announced. We currently assume a DPS of 1.5 UScts when FY15 results are announced.
Need to wait till 1Q16 results to have better sense of earnings normalisation.

Sarine Tech has warned that it will report an operating loss of US$1.5m for 3Q15. This is the second profit warning for 2015, the first being in Apr 15 when the group warned that 1Q15 could just see a breakeven situation. 3Q15 revenues are expected to be down 50% yoy and 33% qoq. Only 1 Galaxy Ultra was sold in the third quarter.

In July, sightholders refused an unprecedented 60%-70% of the offered rough diamonds at DeBeers's already substantially trimmed sight, buying only US$15m0-200m worth of diamonds – the lowest quantity for July since the GFC in 2008-9.
Polishing output dropped to ~40-50% of the normal output in July and August, negating the need for capital equipment investment and further impairing Sarine’s ongoing processing fees.

Sarine’s FY15 dividend policy was a semi-annual payout of 2.5 UScts, subject to business conditions. In its 1H15 results, the semi-annual DPS was reduced to 1.5 UScts. With the operating loss in 3Q15 and a traditionally weak 4Q15, management may need to reassess the business conditions in deciding if it will pay a 2H15 DPS or opt for a reduced DPS once again.

Sarine expects a subdued 4Q15 given the Diwali holiday in India and the still below normal level of rough diamonds being traded despite an 8-10% reduction in rough prices. FY16 will be a key year to regain investor confidence as its smaller rough diamond system, Sarine Meteor, has already been launched and the Allegro gemstone (non-diamonds) processing service centre in Jaipur, India is slated to open in 4Q15.

Until earnings clarity improves, mean reversion is likely and as such, we switch our valuation basis to 15x CY16 earnings (8-year average vs. 18x previously or 0.5 s.d. above 8-year mean).
At the same time, we cut our core EPS for FY15 by 88.5% to factor in the 3Q loss and a weak 4Q. We also cut FY16-17 earnings as a prudent measure till FY16’s quarterly results provide more clues on Sarine’s earnings direction.
TP: S$1.41.

William TNG CFA CIMB Securities | http://research.itradecimb.com/ 2015-10-06

CIMB Securities SGX Stock Analyst Report HOLD Maintain HOLD 1.41 Down 1.80