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

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. 

Warns of 3Q loss 

  • 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. 

Poor July sight 

  • 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. 

Dividends at risk 

  • 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. 

FY16 results crucial 

  • 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. 

Maintain Hold, cut earnings and target price 

  • 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