Sarine Technologies - Maybank Kim Eng 2016-01-07: A glimmer of hope

Sarine Technologies - Maybank Kim Eng 2016-01-07: A glimmer of hope SARINE TECHNOLOGIES LTD U77.SI 

Sarine Technologies (SARINE SP) - A glimmer of hope 

Positive profit guidance 

  • Sarine said that the diamond industry developed positively in 4Q15. It guided for 4Q15 revenue of USD12.25m (+29% QoQ, -33% YoY) and a modest operating profit versus the USD9.5m revenue and USD0.7m operating loss in 3Q15. 
  • Our last 4Q15 forecast was for USD10.6m revenue with a marginal USD0.5m operating loss. 
  • Although this is positive for Sarine, we also note that because the USD10-12m revenue range is near breakeven, profitability is highly sensitive to small changes in revenue. 
  • We raise FY15E/16E/17E EPS by 53% (USD1.6m to USD2.5m)/2%/2% accordingly. 
  • Maintain HOLD and SGD1.29 TP, but we have a long-term DCF fair value of SGD2.54. 

Encouraging industry developments 

  • According to Sarine: 
    1.  holiday season sales were good in the US market, 
    2.  initial wholesale buying for the Chinese New Year season was positive, 
    3.  more than USD5.5b of inventory has been cleared from Indian manufacturers’ stocks and 
    4.  sentiment in the Indian manufacturing industry has significantly improved. 

13 Galaxy machines sold in 4Q15 

  • As a result, Sarine sold 13 Galaxy systems in 4Q15 (3Q15: 1, 2Q15: 6, 1Q15: 5). 
  • We believe that the USD2.8m QoQ increase in 4Q15 sales was mainly bumped up by the Galaxy sales as each unit could fetch an upfront price of up to USD200k. This implies that the revenue growth for the remaining portion was quite modest. 
  • The strong 4Q15 Galaxy sales could also be pent-up demand from the last five quarters of sub-par sales. 
  • While we are confident of Galaxy’s long-term sales and adoption, we worry that this may fizzle off in 1Q16 if industry recovery is not sustained, leading to another stock price sell-down. 

Wait for clearer signs 

  • This is a positive update but not significant enough for us to re-rate the stock as we prefer to see more conclusive evidence of sustained recovery into 1Q16. 
  • We have a long-term DCF-based fair value of SGD2.54 but we rate Sarine as a HOLD with near-term TP of SGD1.29 due to the lack of clear re-rating catalysts in the short term.

Yeak Chee Keong CFA Maybank Kim Eng | 2016-01-07
Maybank Kim Eng SGX Stock Analyst Report HOLD Maintain HOLD 1.29 Same 1.29