Sarine Technologies Ltd - CIMB Research 2015-11-09: Litmus test in FY16

Sarine Technologies Ltd - CIMB Research 2015-11-09: Litmus test in FY16 SARINE TECHNOLOGIES LTD U77.SI 

Sarine Technologies Ltd - Litmus test in FY16 

  • 3Q15’s net loss was 47% lower than expected as operating expenses fell 50% yoy. 
  • 50% of 9M15’s sales was from recurring business. We expect gross margin to pick up once sales return (3Q15’s gross margin was 63.2%). 
  • Continues to execute as planned on new product and services introduction. 
  • Still maintaining a net cash balance sheet. 
  • Re-rating possible in 1H16 if industry conditions normalise. 

Losses narrow on 50% cut in operating expenses 

  • 3Q15’s net loss of US$0.7m was 47% lower than Sarine’s previous profit warning of a US$1.5m loss. 9M15 net profit was 31% above our earlier revised down full-year forecast. This was primarily achieved via cost cutting, with general and administrative expenses down 50% yoy. 
  • Revenue also fell 50% yoy, mainly due to: 
    1. disparity between rough and polished prices; 
    2. high polished inventory; and 
    3. the continued lack of credit availability to its customers. 

FY16 to be litmus test 

  • FY16 is slated to be the litmus test for Sarine as all its new product offerings are commericalised. 
  • Industry conditions-wise, Sarine has cited some alleviation of the credit availability issue and polished inventory being pared down. De Beers seem to believe that the inventory issue is working its way out and has been selective in cutting rough prices. 
  • On the demand side, Sarine does not see any indication of lower consumer demand for diamond jewellery from any significant market. 

Balance sheet remains strong 

  • Sarine’s balance sheet remains healthy, with short-term investments in bank deposits of US$12.7m and cash of US$19.1m. 
  • The company has no bank debt. 
  • Of its trade receivables, there is one customer that accounts for less than 20% (or less than US$2.0m) of receivables. If a worst case scenario of a default were to occur, Sarine will be able to stomach it. 

No competitive threat 

  • Sarine remains entrenched as the market leader. The company has no new developments to report on its competitors and the current industry conditions do not favour new competing product introductions and launches. 
  • At the same time, Sarine has the most complete and compelling solutions for the industry. 

Lower R&D and opex assumptions for FY16 

  • Given the company’s willingness to exercise some flexibility in its operating expenses and guidance of lower R&D expense into FY16, we have reduced our FY16 cost assumptions, leading to an 11% increase in our FY16 EPS estimates. 
  • The FY15 earnings revisions reflect our expectations of a lower loss in 4Q15. 
  • Rolling over to FY17, our 12.5x P/E multiple sees a new target price of S$1.77
  • Maintain Hold.

William TNG CFA CIMB Securities | http://research.itradecimb.com/ 2015-11-09
CIMB Securities SGX Stock Analyst Report HOLD MAINTAIN HOLD 1.77 Up 1.41