Sarine Technologies - Maybank Kim Eng 2015-11-11: Write-off year, look to 2016

Sarine Technologies - Maybank Kim Eng 2015-11-11: Write-off year, look to 2016 SARINE TECHNOLOGIES LTD U77.SI 

Sarine Technologies - Write-off year, look to 2016 

  • 3Q15 EBIT loss of USD0.7m was narrower than the USD1.5m guided in its profit warning. FY15E still a write-off year. 
  • 4Q15 outlook muted. But progressing well on new product introductions and launches. 
  • Maintain HOLD and SGD1.29 TP. Long-term DCF fair value still at SGD2.54. Awaiting more concrete signs of recovery from 1Q16 for re-rating. 

What’s New 

  • 3Q15 was a net loss of USD1.4m (-125% YoY, -154% QoQ). EBIT loss of USD0.7m was less than the USD1.5m loss guided in its profit warning on 1 Oct 15. We believe this was due to lower SG&A. 
  • The poor results were attributed to: 
    1. rough-polished diamond price mismatch; 
    2. high polished inventory; and 
    3. squeezed working capital of manufacturers, all of which led to weaker capital equipment purchases. 
  • Only one Galaxy machine was sold in 3Q15 (2Q15: 6, 3Q14: 7) and total installed base is now at 202. 
  • About half of its revenue was recurring in nature. 

What’s Our View 

  • We expect manufacturing activities to remain suppressed in 4Q15, given the Diwali holidays and DeBeers preferring to defer sales than drop prices. 
  • Sarine said there are signs of inventory being cleared with industry credit exposure having shrunk by ~USD5b in 2015. 
  • Peak buying seasons during Christmas, Chinese New Year and Valentine’s Day may also help to spur demand, setting the stage for a likely normalisation from 2016. 
  • Sarine continues to market its new polished diamond products, which it says are progressing well. FY15E is a write-off year. 
  • We still believe in the eventual adoption of Sarine’s technologies and have an unchanged DCF fair value of SGD2.54. But near-term wise, the stock price may drift towards its last low of SGD1.29 because of low liquidity and lack of near-term catalysts. 
  • Marginal 1% change in FY15 EPS. Maintain HOLD and await clearer signs of turnaround, earliest in 1Q16, before we rerate the stock.

Yeak Chee Keong CFA Maybank Kim Eng | 2015-11-11
Maybank Kim Eng SGX Stock Analyst Report HOLD Maintain HOLD 1.29 Same 1.29