Sarine Technologies - Maybank Kim Eng 2016-07-07: Diamond in the rough

SARINE TECHNOLOGIES LTD U77.SI

Sarine Technologies (SARINE SP) - Diamond in the rough

Sarine guided that 2Q16 revenue could exceed USD20m due to positive midstream profitability that continued to drive manufacturing activities.
The company delivered a record of 20 Galaxy-related machines in 2Q16 (1Q16: 18, 2Q15: 6), of which 10 were for the new Meteor, eight Solaris and two Galaxy Ultra. This development supports our views expressed on 25 May 2016, The Path to Normalcy, where we highlighted industry data points that suggest recovery remains on track.

Maintain BUY and DCF-based TP of SGD1.94 (WACC of 13.3% and terminal growth of 2%).

In previous quarters when revenue exceeded USD20m, net profit ranged from USD5.7-9.1m. But Sarine also cautioned about increased sales & marketing expenses as it intensified the rolling out of its polished diamond services.
Still, we expect 2Q16 net profit to come in at least at the low end of its historical range, which would almost double its net profit, both QoQ and YoY. It would also mark the third consecutive quarter of sequential recovery.

Despite the encouraging sales guidance, some uncertainties remain. Rapaport reported that traffic in the JCK Las Vegas and Hong Kong Jewellery trade shows in Jun were quite muted. Therefore end-consumer demand has not picked up sufficiently yet.
Polished diamond prices also fell in Jun reversing some of the gains made in 1H16. Conversely, Sarine told us that while traffic for JCK was subdued, activities were more focused and business-like, and their customers actually thought that the trade show was better-than-expected.

We think that manufacturer profitability needs to be sustained to maintain midstream (Sarine’s customers) activities. If polished prices continue to weaken, rough prices would also need to come down.
De Beers sold USD560m of rough in Sight 5 (Sight 4: USD636m, Sight 3: USD666m | Sight 5 2015: USD550m), which is considered steady due to seasonality, but trends ahead warrant monitoring.
If the industry does not over-extend itself again this time, the worst is likely over.

Yeak Chee Keong CFA Maybank Kim Eng | http://www.maybank-ke.com.sg/ 2016-07-07

Maybank Kim Eng SGX Stock Analyst Report BUY Maintain BUY 1.94 Same 1.94