Sarine Technologies Ltd - CIMB Research 2016-11-15: 3Q16 earnings below expectations

Sarine Technologies Ltd - CIMB Research 2016-11-15: 3Q16 earnings below expectations SARINE TECHNOLOGIES LTD U77.SI

Sarine Technologies Ltd - 3Q16 earnings below expectations

  • 9M16 net profit below expectation at 64% of our full-year forecast.
  • Recovery continues with no major issues reported on the business front.
  • Making progress in the polished diamond segment with its Sarine Profile offering.
  • Net cash balance sheet with no debt.
  • Rollover to CY18 P/E. Maintain Add.

3Q16 core net profit below expectations 

  • 3Q16 core net profit was below expectations at 20% of our full year forecast. 9M16 net profit was below at 64% of our full-year forecast. 
  • Traditionally, the 2H tends to be weaker due to the Diwali holiday in India. 
  • Gross margin improved to 69% on higher margin sales vs. 63% in 3Q15. During the quarter, 22 Galaxy family machines were delivered to customers, and recurring revenue was 40% of total turnover for 9M16.

Balance sheet remains healthy 

  • Balance sheet remains strong with net cash of US$34.8m. Sarine Tech does not have any bank borrowings. During the quarter, the company generated US$5.3m in cash from operations and free cashflow of US$3.8m. 
  • For the nine months, operating cashflow was US$17.8m and free cashflow was US$14.3m.

Recovery continues 

  • In the US, the largest single market for polished diamonds, diamond jewellery sales continue to indicate a positive trend. At the Hong Kong Jewellery & Gem Fair in the second-half of Sep, business was more robust and Sarine expects the momentum to continue into 1Q17. 
  • Sarine also expects rough diamond sales and polishing activity to remain robust for the rest of the year. According to management, there are also no known polished diamond inventory issues currently.

Polished diamond business continues to make inroads 

  • Its digital sales tool Sarine Profile made further inroads during the quarter. New customer wins include Meidie of China and Grace Fujimi from Japan. Additional programmes with retailers in the US and Australia are launching in 4Q16. Efforts continue to be focused on promoting its Sarine Profile offering. 
  • The company is adding new functions (such as clarity grading and in-grade sub-sorting capabilities) into this offering.

Maintain Add 

  • We cut our FY16-18 EPS forecasts by 18-26% to reflect slower sales recovery. 
  • We rollover to FY18F and our target price remains unchanged at S$1.95 still based on 15.3x P/E multiple, its 9-year average. Maintain Add. 
  • Key risk is deterioration in global economic conditions. 
  • Re-rating catalysts are better-than-expected profit contribution from its Profile offering and newly added clarity grading and in-grade sub-sorting capabilities.

Willam TNG CFA CIMB Research | 2016-11-15
CIMB Research SGX Stock Analyst Report ADD Maintain ADD 1.950 Same 1.950