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

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. 
  • Share price already reflects the negatives, upgrade to Add from Hold. 

■ 4Q15 profit above expectations 

  • 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. 

■ Board declares the worst is over 

  • 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 improved 

  • 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. 

■ Dividend policy adjusted downwards as expected 

  • 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 third growth engine will take some time 

  • 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. 

■ Priced in; upgrade to Add 

  • 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 | 2016-02-29
CIMB Securities SGX Stock Analyst Report ADD Upgrade HOLD 1.67 Down 1.77