Sarine Technologies Ltd - CIMB Research 2016-05-09: Sentiment improved in 1Q16

Sarine Technologies Ltd - CIMB Research 2016-05-09: Sentiment improved in 1Q16 SARINE TECHNOLOGIES LTD U77.SI 

Sarine Technologies Ltd - Sentiment improved in 1Q16 

  • 1Q16 net profit was below expectations, at 14% of our forecast as demand recovery was still below average. However, industry conditions continued to improve in 1Q16. 
  • Sarine sold 18 units of Galaxy family equipment. Installed base was 233 machines. 
  • Expect selling and marketing expenses to rise, as it continues to implement efforts to expand its third earnings driver- polished diamond segment. 
  • 1Q16 effective tax rate was higher at a 23% rate. Tax rate is expected to decline as revenue increases. 
  • Maintain Add with higher target price of S$1.95, as we raise our target CY17 P/E to 15.3x (9-year average P/E). 

■ 1Q16 net profit was below expectations 

  • 1Q16 core net profit was below expectations at 14% of our FY16 forecast and compared to historical average of 32%. This was due to still slow demand recovery. However, we believe FY16 will be a year of recovery, after the demand drop in FY15. 
  • 1Q16 revenue growth of 27.4% yoy, combined with a 6% decline in total operating expenses, led to the 240% increase in net profit. 
  • In 1Q16, Sarine delivered 18 units of Galaxy family systems and recurring revenue accounted for 40% of total revenue. 

■ Industry conditions continue to get better 

  • Industry conditions continued to improve in 1Q16. 
  • Polished diamond prices rose 5% yoy in 1Q16, while rough diamond prices declined by 20-25% yoy. 
  • Demand from most markets (excluding Hong Kong) was stable yoy. 
  • Inventories of polished diamonds in the downstream segment are being depleted. 
  • Recent data also show that the US dollar sales of rough diamonds are increasing. Las Vegas JCK and Hong Kong trade shows in Jun will provide clarity on the stability of demand recovery. 

■ Continued efforts to market Sarine Profile 

  • We expect that Sarine’s efforts to develop its third earnings engine- the diamond retail (polished diamond) segment- will gather pace in FY16. 
  • Sarine guided for an increase in the number of marketing staff at its newly-established Hong Kong regional sales headquarters, as well as in the US, to support the rising interest in its Sarine Profile offering. 
  • Contribution from this segment amounted to 1-4% of 1Q16 revenue. 

■ Maintain Add 

  • We raise our target C17 P/E for Sarine from 12.5x to 15.3x (9-year average), given the improvement in earnings outlook. This raises our target price to S$1.95. 
  • Maintain Add. 
  • Apart from the risk of industry conditions deteriorating again, the two key earnings risks for FY16 are steeper-than-expected increase in selling and marketing expenses and higher tax rate. 
  • Management expects the tax rate of 23% in 1Q16 to decline as revenue rises. Potential catalysts are stronger-than-expected demand recovery.

William TNG CFA CIMB Securities | 2016-05-10
CIMB Securities SGX Stock Analyst Report ADD Maintain ADD 1.95 Up 1.67