Sarine Technologies Ltd - CIMB Research 2015-12-09: Getting back its shine in 2016?

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SARINE TECHNOLOGIES LTD U77.SI 

Sarine Technologies Ltd - Getting back its shine in 2016? 

• Downside risks priced in. 
• Normalcy expected in 2016. 
• Full throttle on efforts to develop third profit engine. 
• Only viable supplier in town, with no significant competitor. 
• Maintain Hold. Investors unlikely to re-rate the stock until greater clarity from 1Q16 earnings. 

■ Woes are well documented 

• Sarine’s woes are well understood by now. The company issued two profit warnings in 2015. The three key challenges were 
  1. disproportionately high rough diamond prices versus polished diamond prices, 
  2. high polished diamond inventory levels, resulting in a cut back in polished diamond production, and 
  3. continued squeezed working capital and credit lines of manufacturers. 

■ Expecting normalcy in 2016 

• On the demand front, Sarine sees no indications of lower consumer demand for diamond jewellery from any significant market. 
• The company expects normalcy to return in 2016 given that polished diamond inventories are expected to be whittled off by early 2016 and that rough diamond pricing will ease further. 

■ Diamond retailers to be third profit engine 

• Sarine Profile, targeted at diamond retailers, has commenced trials with leading brick and mortar and online retailers in the US and the Far East. 
• Targeted at smaller stones, Meteor has also been commercially launched. 
• Targeted at non-diamond gemstones, Allegro will be launched at a service centre in India, with additional service centres in Israel, South America and Thailand slated for 2016. 

■ Only viable game in town 

• 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. 

■ Maintain Hold 

• The company’s willingness to exercise some flexibility in its operating expenses and guidance of lower R&D expense into FY16 will help improve profitability. 
• Our target price of S$1.77 is perched on 12.5x CY17 earnings.

William TNG CFA CIMB Securities | http://research.itradecimb.com/ 2015-12-09

CIMB Securities SGX Stock Analyst Report HOLD MAINTAIN HOLD 1.77 Same 1.77