Sarine Technologies Ltd - CIMB Research 2016-08-08: Expect a better 2H

SARINE TECHNOLOGIES LTD U77.SI

Sarine Technologies Ltd - Expect a better 2H

2Q16 net profit at 28% of our FY16 estimate; deemed in line as FY16 could be skewed by a stronger 2H as industry conditions continue to improve.
Sarine sold 20 units of Galaxy family equipment. Installed base was 253 machines.
Expect selling and marketing expenses to rise, as it continues to implement efforts to expand its third earnings driver -- polished diamond segment.

2Q16 effective tax rate lower, at 13%. Tax rate to remain low as export revenue increase.
Maintain Add with target price of S$1.95, based on 15.3x CY17F P/E (9-yr average).

2Q16 core net profit deemed to be in line at 28% of our FY16 forecast.
Traditionally, the 2H tends to be weaker due to the Diwali holiday in India. However, given the continuation of the industry recovery which gained momentum from 1Q16, we opine that 2H16 could be stronger than 1H16 this year.
Gross margin improved to 69% on higher margin sales. During the quarter, 20 Galaxy family machines were delivered to customers, and recurring revenue was 40% of total turnover.

Balance sheet remains strong with net cash of US$37.4m. Sarine Tech does not have any bank borrowings.
During the quarter, the company generated US$8.4m in cash from operations and free cash flow of US$47.1m.
In line with its revised dividend policy, an interim DPS of US 2 cts was declared.

The recovery in industry conditions seen in 1Q16 continued into 2Q. In the major jewellery shows of Las Vegas JCK and Hong Kong Jewellery & Gem Fair, exhibitors reported that business was in line with subdued expectations.
All players in the industry have been cautiously monitoring inventory levels and Sarine believes its new products can help improve inventory management.

Its digital sales tool Sarine Profile made further inroads with formal launches by its customers in China (Shining House, Kela and Hope), Soo Kee in Singapore and GN in North America.
More rollouts by customers are scheduled in 2H16.
The company has expanded its staff strength in HK and New York.

As we fine-tune our FY16 forecasts to account for bonus provision, one-off legal and relocation costs, our FY16 core EPS dips slightly by 3.6%.
Our target price for Sarine Tech remains S$1.95 (based on CY17F P/E of 15.3x, 9-year average P/E), given the improvement in earnings outlook.
Maintain Add.
Key risk is a deterioration in global economic conditions. Re-rating catalysts are better-than-expected profit contribution from its Profile offering.

William TNG CFA CIMB Research | http://research.itradecimb.com/ 2016-08-08

CIMB Research SGX Stock Analyst Report ADD Maintain ADD 1.950 Same 1.950