Sarine Technologies - Maybank Kim Eng 2016-05-09: Another Step Forward

Sarine Technologies - Maybank Kim Eng 2016-05-09: Another Step Forward SARINE TECHNOLOGIES LTD U77.SI 

Sarine Technologies (SARINE SP) - Another Step Forward 

Missed but recovery growth intact. Maintain BUY 

  • Sarine continued to recover as 1Q16 net profit surged 240% YoY and 101% QoQ to USD3m, but was below our USD4-5m expectation. 
  • Nevertheless, Sarine could have met our estimate with just an incremental USD1.5- 2.0m in revenue due to operating leverage. 
  • Our FY16E assumes sequential recovery towards a more normalised USD5-7m net profit quarter. 
  • Still, we cut our FY16-18E earnings by 1-12% due to the weaker 1Q16. DCF-based TP trimmed from SGD1.97 to SGD1.94 (WACC: 13.3%, g: 2%)
  • Maintain BUY for recovery and long-term technology adoption but market may need more evidences to be convinced. 

Machine sales jumped 

  • Sarine sold 18 (10 Meteors, 4 Solaris & 4 Galaxy/Galaxy Ultra) Galaxy systems in 1Q16 (4Q15: 13, 1Q15: 5), bringing installed base to 233. 
  • Recurring revenue accounted for 40% of total revenue and grew 30% QoQ. The positive results were driven by stronger activities in the midstream due to: 
    1. renewed manufacturer profitability; 
    2. improved demand; 
    3. inventory restocking; and 
    4. better midstream liquidity. 

Strong rough market but mixed polished market 

  • After a strong 1Q16 in both the rough and polished diamond markets, we see some divergence. 
  • What’s positive: De Beers had its highest sales YTD in its Apr Sight even with a 2% price increase, while Alrosa sold almost all of its rough offerings. Both companies sold c.USD1b worth of rough in Apr alone, vs USD2.4b in 1Q16. 
  • What’s mixed: Polished diamond demand slowed in Apr, partly due to seasonality, but also because supply had built up during the robust 1Q production. US consumer demand is steady but the Far East and European markets are more restrained. 

Watch data points to confirm normalisation 

  • Sarine said that even after the industry restocking, inventories are still below 2014 peak and manufacturers are prudent not to overstock. 
  • We think that baring any irrational rough price hike by DeBeers or inventory overbuilds, the industry could move towards normalisation in FY16. 
  • We will watch for short-term data points from subsequent DeBeers Sights (Next Sight: 16-20 May), JCK Las Vegas trade show (3-6 Jun) and Hong Kong Jewellery & Gem fair (23-26 Jun) for further confirmation. 

Yeak Chee Keong CFA Maybank Kim Eng | 2016-05-09
Maybank Kim Eng SGX Stock Analyst Report BUY Maintain BUY 1.94 Down 1.97