Sarine Technologies Ltd - CIMB Research 2016-02-29: Board of Directors: Worst is behind us

SARINE TECHNOLOGIES LTD U77.SI

Sarine Technologies Ltd - Board of Directors: Worst is behind us

4Q15 above on recovery in customer demand.
The Board believes the worst of the industry downturn is over.
Industry conditions improved. Customers experiencing healthy profit margins again.
Efforts to develop third earnings engine will take longer.

4Q15 earnings were above our expectations at 196% of our forecast, but comparisons were not meaningful as FY15 was mired by extreme industry conditions.
Aggressive cost reduction in FY15 and the delivery of 13 Galaxy family systems following a dismal 3Q15 where only 1 unit was sold aided the beat.

Sarine’s Board believes that the “worst of the industry downturn is behind”. However, the extent and speed of the recovery remains unclear and clouding confidence in a strong recovery are the possible negative effects given current instabilities in the equity markets and fluctuating exchange rates.

Industry conditions have visibly improved. Demand in the largest diamond jewellery market, the USA, was healthy (best Valentine’s Day sales on record and 3% yoy revenue increase for the Christmas holiday).
Rough diamond prices have corrected through 2015 by 15-20% and have fallen a further 7-10% recently. Inventories in a broad range of polished diamonds have been whittled down and diamond manufacturers are again reporting healthy profit margins.

Sarine has opted to be prudent given the current ongoing global economic uncertainties and has cut its dividend policy to a semi-annual DPS of US 2.0cts (prev. US 2.5cts). This brings Sarine’s dividend policy in line with our expectation.
For FY15, a final DPS of US 1.5cts was declared as expected.

Efforts to develop a third earnings engine in the diamond retailing segment (polished diamond segment) remains a work in progress.
Revenue contribution from the polished diamond segment was ~1% of FY15 sales. We believe the development of polished diamond customers will take some time.

We adjust our forecasts downward to factor in the uncertain global economic outlook. However, the bad news is already reflected in the price unless industry dynamics go into a tailspin again. Hence, we upgrade to Add.
We cut our target price due to S$1.67, still based on 12.5x (0.5 s.d. below 8-year ave).
Where crisis valuation is concerned, using the 2009 GFC as a reference, the low P/E of 8.4x points to S$1.12.
Potential catalysts are stronger-than-expected recovery.

William TNG CFA CIMB Securities | http://research.itradecimb.com/ 2016-02-29

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