■ Rough prices reportedly stable at De Beers’ June sight. Neutral for Sarine.
■ Low rejection rates despite price dissatisfaction.
■ Maintain BUY & DCF TP of SGD3.07. Catalysts expected from 2H15 recovery.
De Beers’ fifth sight of the year on 8-12 Jun ended with estimated sales of USD550m. According to Rapaport, rough prices were stable, with slight increases in the box price of larger stones. Sightholders had hoped for further price cuts following May’s 3% drop, but this did not materialise. That said, rejection rates were ‘small’ despite complaints of high prices, unlike the 20-30% rates during Sight 1 in Jan 2015 and Sight 3 in Mar 2015.
What’s Our View
We are neutral on the outcome. It would have been better had there been further drops in rough prices, potentially triggering strong take-up of De Beers’ goods. But the outcome was not negative either as rejection rates were reportedly low. We think that buyers’ willingness to take goods may suggest a temporary acceptance of rough prices, seeing hope in rising polished prices. This followed improved sentiment on US polished demand after the JCK show (report) three weeks ago.
Challenges remain for 2Q15. We expect a more meaningful recovery only in 2H15 from normalising sales backed by pent-up demand. Sarine reported “overwhelming” interest in its Sarine ProfileTM product and closed some significant deals during the JCK show. Rosy Blue, a leading manufacturer, will also be replacing all its manufacturing equipment with Sarine products. In our view, Street estimates are over-pessimistic and may have discounted added potential from its polished-diamond segment in FY16-17. We keep our forecasts and DCF TP of SGD3.07 (WACC 9.6%, Terminal growth 2%). Maintain BUY. (Read Report)
Source : Maybank Kim Eng Research