Sarine Technologies - Maybank Kim Eng 2016-02-29: Recovering its Sparkle

SARINE TECHNOLOGIES LTD U77.SI

Sarine Technologies (SARINE SP) - Recovering its Sparkle

FY15 net profit of USD3.6m (-87% YoY) beat our USD2.5m on lower costs.
The beat was nothing remarkable as Sarine was near breakeven and sensitive to small above-the-line changes. But its reversal from a 3Q15 loss to a 4Q15 net profit of USD1.5m (-62% YoY, -203% QoQ) was commendable.

A final DPS of USD 1.5 cts also surprised pleasantly, as we were not expecting any.
Still, Sarine cut its dividend policy from USD 2.5 cts/half-year to USD 2.0 cts/half-year, a reflection of its cautious outlook.
Despite cutting FY16-17E EPS by 13-20% to reflect more cautiousness, we believe that the worst is likely over.
U/G from HOLD to BUY with TP raised from SGD1.29 to SGD1.97, now based on DCF.

Positive industry developments included:
1. stronger US holiday sales (+1-2% YoY);
2. a further 7-10% drop in rough diamond prices in 2M16 following a 15-20% decline in 2015; and
3. an apparent work-down of polished-diamond inventory, with industry working-capital credit shrinking c.25% or USD5b.
4. rough diamond in-plan demand for the next sight in April was nearly double at USD1b.
These trends have arguably created conditions for a return of midstream diamond polishing to profitability.
But risks to watch include:
1. still-weak Chinese demand;
2. attempts by an Indian player to replicate Sarine’s GalaxyTM technology, although its quality is purportedly inferior; and
3. potential fallouts in currency and equity markets which may impair the industry once again.

GalaxyTM sales jumped in 4Q15 to 13 units (3Q15: one, 4Q14: seven), helped by a new MeteorTM model and pent-up demand.
Sarine also shared that 2M16 orders already equalled its entire 4Q15 business, implying that 1Q16 should not be worse off than 4Q15.

We believe that Sarine is on a recovery path and sequential earnings growth should provide clear catalysts for stock re-rating.
Upgrade from HOLD to BUY with DCF-based TP of SGD1.97 (WACC: 13.3%, g: 2%).
We have raised WACC from 11.0% to 13.3% to reflect the highlighted risks. This also assumes that adoption of its technology comes to pass.

Yeak Chee Keong CFA Maybank Kim Eng | http://www.maybank-ke.com.sg/ 2016-02-29

Maybank Kim Eng SGX Stock Analyst Report BUY Upgrade HOLD 1.97 Up 1.29