Sarine Technologies - Maybank Kim Eng 2016-08-08: Industry conditions still supportive

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SARINE TECHNOLOGIES LTD U77.SI

Sarine Technologies - Industry conditions still supportive

2Q16 in line, doubling both YoY and QoQ 

• 2Q16 net profit of USD6m (+126% YoY, +104% QoQ) met expectation in our last report, and revenue was consistent with Sarine’s guidance of > USD20m. 
• The stronger 2Q16 was due to improved midstream activities following: 
  1. higher manufacturing profitability with lower rough prices; 
  2. stronger consumer demand; and 
  3. better midstream liquidity after destocking in 2015. 
• Interim DPS of USD2.0 cts is in line with its fixed policy of USD2.0 cts/half-yearly. 
• Maintain BUY, DCF-based TP (still on 13.3% WACC and 2% terminal growth) raised from SGD1.94 to SGD2.07 after rolling forward to FY17.

Record deliveries of GalaxyTM systems 

• Sarine delivered a record of 20 Galaxy systems (10 Meteors, 8 Solaris and 2 Galaxy Ultra) in 2Q16 (2Q15: 6, 1Q16: 18). This brings total installed bases to 253. 
• Recurring revenue accounted for 40% of total revenue in 1H16. Sarine expects FY16 to be a record year for Galaxy deliveries vs the typical 40+ per year. 
• But we note that the record deliveries will also be due to the new lower-end Meteor, which contributed significantly to unit counts from 1Q16. 
• Nevertheless, we see that midstream activities are still supportive, judging by De Beers’ Jul USD520m sales (May: USD550m, Jun USD560m). This is lower sequentially but it’s still substantially higher than the c.USD308m a year ago.

Sarine ProfileTM making more in-roads Profile

• We see progress in Sarine ProfileTM, now used by several retailers in Japan, China, Singapore and the US. Sarine said there are plans for expanded programmes with existing customers and the addition of new customers in subsequent quarters. More adoption by reputable players could lend further confidence to our long-term investment thesis.

TP raised as we roll forward to FY17; still a BUY 

• Our DCF-based TP is raised to SGD2.07 as we roll forward our valuation target to FY17. 
• Short-term wise, we believe industry conditions could still support a stable 3Q16 and a stronger 2H16 remains on track. 
• More importantly, our key investment thesis for the adoption of Sarine’s technologies has made progress, with further penetration of Galaxy systems and Sarine Profile. 
• Maintain BUY.

Yeak Chee Keong CFA Maybank Kim Eng | http://www.maybank-ke.com.sg/ 2016-08-08

Maybank Kim Eng SGX Stock Analyst Report BUY Maintain BUY 2.07 Up 1.940