Sarine Technologies Ltd - CGS-CIMB 2018-05-14: Robust Midstream Underpins Earnings Growth

Sarine Technologies Ltd - CGS-CIMB 2018-05-14: Robust Midstream Underpins Earnings Growth SARINE TECHNOLOGIES LTD SGX: U77

Sarine Technologies Ltd - Robust Midstream Underpins Earnings Growth

  • Sarine Technologies’ 1Q18 net profit grew 27% y-o-y to US$3.1m. We deem this in line with expectations at 18% of our full-year forecast.
  • The delivery of 12 Galaxy family systems in the 1Q18 affirms our outlook of growth recovery ahead for the remainder of FY18F.
  • Continued IP enforcement activities curtailed activities infringing Sarine’s technology.
  • Received keen interests for its new AI-based 4Cs diamond grading solution with Japanese jewellery retailer, K-Uno, confirming adoption.
  • Maintain ADD with an unchanged Target Price of S$1.53, based on 17.2x FY19 P/E.

1Q results in line, with continued growth recovery on track.

  • Sarine’s 1Q18 net profit expanded 27% y-o-y to US$3.1m on the back of a 2.4% revenue growth, deemed in line with our expectations. The topline increase was underpinned by sales of 12 inclusion-mapping systems during the quarter as well as higher Galaxy-related recurring revenue generated from the number of rough diamond stones scanned. 
  • EBITDA margin improved by 1.3% points to 26.8% on lower R&D expenses, offset by higher third-party professional fees related to IP protection activities in India and the US.

Positive on midstream recovery despite increases in rough prices

  • Notwithstanding 2-3% increases in rough prices by De Beers in April 18, management is positive this is unlikely to deter recovery in midstream manufacturing activities as the increase is deemed in line with De Beers’ stated policy for 2018. This has led to a quarterly increase in recurring revenue (c.US$7.5m in 1Q18, compared to c.US$6.8m and c.US$6.9m in 1Q17 and 4Q17 respectively) and equipment sales. 
  • The group anticipates robust midstream activities ahead on stabilised polished inventories level.

Continued positive progression in IP protection

  • Management expressed optimism that illicit competition, though still present, has been curtailed significantly amid ongoing lawsuits in India, IP enforcement in the US downstream market and progressive migration of its existing customer base to the latest Advisor 7.0 software version running on its inclusion mapping systems (note that illicit competition was using hacked older Advisor 5.x versions). 
  • To date, over 12,000 installations of its 20,000 over installed systems have migrated to the latest version.

Second gem lab on track to open by end-May in India

  • Sarine is on schedule to open its second gem lab in India by the end of May. Its gem lab employs its latest AI-based 4C diamond grading solutions that saw significant interest in the recent diamond trade shows held this year. 
  • K-Uno, a Japanese jewellery retailer, has announced its adoption of Sarine’s 4C grading reports in mid-April. 
  • With significant time savings and better consistency that could be potentially reaped, we anticipate more customer adoption towards end-FY18F.

Maintain ADD with unchanged Target Price of S$1.53

  • We remain positive on continued traction of higher equipment sales in FY18F in view of healthy midstream manufacturing activities in the diamond value chain ahead. 
  • We maintain our ADD call with an unchanged Target Price of S$1.53, pegged to 17.2x FY19 P/E which represents a 10% discount to its historical 9-year average P/E.
  • The stock is trading at an FY18F dividend yield of 5%. 
  • Key risks to our call include slowdown in diamond midstream. 
  • Upside catalysts could come from stronger-than-expected earnings.

Colin TAN CGS-CIMB | https://research.itradecimb.com/ 2018-05-14
SGX Stock Analyst Report ADD Maintain ADD 1.530 Same 1.530