Sarine Technologies - Conference takeaways: inventory situation is improving


■ 3Q15 impacted negatively by pricing disparity and inventory build-up

■ Management expects inventory situation to normalize by 2Q16

■ Planned new product launches are on track

Background:
Sarine Technologies, a supplier of precision tools in the diamond industry, presented at the Daiwa Investment Conference in Hong Kong. Its Chairman Daniel Glinert is optimistic that current challenges facing the industry – inventory overhang, pricing disparity in the midstream market – could be resolved by 2Q16.

Highlights:
The company said that the current negative conditions in the midstream market segment is driven by:

1) disparity in pricing between rough and polished diamonds, which management sees as being unsustainable in the medium-term,

2) inventory build-up and

3) squeeze in credit lines for manufacturers partly as a result of inventory build-up.

These factors have resulted in company reporting a 53% YoY decline in its revenues, and an operating loss (USD 0.7m) for 3Q15. The 3Q15 loss was around 50% better than the company’s guidance issued early October.

Sarine said that some recent indicators suggest that the inventory situation could normalize by 2Q16. Management said that on a leading industry bulletin board, both the quantity (down 12%) and value (down 7%) of diamonds available for sale have fallen over the past two months. In addition, outstanding bank credit to manufacturers, according to the company, has declined by 24% over the past year.

In the meantime, the company is forging ahead with its plans to drive future growth.

Its strategy revolves around:
1) expansion of addressable market for its current midstream market with launch of new product Meteor

2) entry into adjacent market segments in the polished diamond trade with offerings such as Sarine Profile, and

3) entry into non-diamond gemstone manufacturing process with products under the Allergro brand.

Some of its recent and upcoming initiatives in this regard include the commencement of trial programs with leading retailers in the US for its Sarine Profile and the planned mid-November opening of Allergo service centre in India. In addition, the company is also launching new functionalities – automatic fine sorting of stones – that can help improve returns for Indian manufacturers towards end of November.

Finally, management said that the company’s strong balance sheet position (3Q15: USD 31.8m in net cash) should help it ride out and emerge stronger from current industry downturn.

Technical Analysis
Daily Chart
Valuation:
Based on Bloomberg consensus, Sarine is trading at 2016E PER of 14x. Consensus is expecting company’s profits to improve from USD 2.5m in 2015 to USD 25m by 2016. (Read Report)

Source : Daiwa Capital Markets

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