Sarine Technologies - May take longer to normalise

■ 2Q15 missed. Interim DPS cut to USD 1.5 cts vs last year’s USD 2.0 cts and 1.0 cts special. Cut FY15-17E EPS by 14-46%.

■ Thesis for strong earnings growth from eventual adoption of game-changing technologies still intact.

Maintain BUY with DCF TP of SGD2.82 (from SGD3.07) as we roll forward to FY16E, and higher discount rate.

Sequential recovery weaker than expected
2Q15 net profit of USD2.7m (-68.7% YoY, +207.6% QoQ) was below our expectation of USD4-5m. 1H15 net profit of USD3.6m (-79.9% YoY) formed only 14% of our FY15E.

The weaker-than-expected recovery was due to persistent negative industry conditions:
(1) high rough diamond prices vs polished prices,

(2) excess inventory,

(3) mixed consumer demand, and

(4) limited credit availability for Indian manufacturers.

Six GalaxyTM machines were sold in 2Q15 (1Q15: 5, 2Q14: 19). Recurring revenue formed half of total sales. Interim DPS cut to USD 1.5 cts, vs 2Q14’s USD 2.0 cts plus 1.0 cts special and its fixed policy of USD 2.5 cts/half-year.

But technology adoption thesis still intact
While we believe the earnings bottom had passed in 1Q15, we now see sales normalising in 1Q16 instead of 2H15. As a consequence, we cut FY15/16/17E EPS by 46/17/14%. But with pent-up demand and higher installed Galaxy base, we forecast FY16E earnings will easily surpass FY14’s USD27.2m as it emerges from the short-term industry blip. We remain confident that an eventual adoption of its game-changing technologies (report) would lead to strong earnings growth, which is still the stock’s key investment thesis.

Management thinks that DeBeers is softening its pricing stance and this could be the tipping point of a stronger industry recovery.


Technical Analysis
Daily Chart
Our DCF TP is cut from SGD3.07 to SGD2.82, as we roll forward to FY16E. We also used a higher WACC discount rate of 11.0% vs 9.6% previously on higher Beta given its increased volatility. This is partly offset by higher USD/SGD. Maintain BUY. (Read Report)

Read Related Report
Sarine Tech - Are we there yet?
Tuesday, 11 August 2015
- CIMB Research

Source : Maybank Kim Eng Research

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