Sarin Technologies

Kim Eng on 8 May 2012

Stellar 1Q, raise TP to SGD2.28. Sarin’s 1Q12 results surprised on the upside with revenue coming in at USD19.7m (+61% YoY, +40% QoQ) and net profit at USD7.8m (+137% YoY, +63% QoQ). Gross profit margin held steady at 71.2% on a QoQ basis. With 1Q12 net profit achieving 34% of our full-year forecast, we increase our FY12 net profit forecast by 33%. Maintain BUY with the target price raised to SGD2.28.

Jump in sales momentum. The stellar performance was driven by accelerated sales of GalaxyTM-related products, as well as higher demand for traditional planning systems in India due to capacity expansions to cope with an increased supply of Zimbabwean rough diamonds. GalaxyTM-related sales accounted for one-third of overall sales and recurring revenue made up about 20% of total revenue. Sales to India increased by 77% YoY and 50% QoQ.

Will the uptrend last? We expect the sales momentum to be sustained in the next two quarters as the market bumps up capacity to deal with the supply of Zimbabwean diamonds. The fourth-quarter may see some seasonal decline due to the Diwali holiday in India, but we expect sales from Sarin’s new polished diamond products to mitigate the drop.

GalaxyTM deployment on track. Sarin deployed an additional 14 GalaxyTM machines in 1Q12, including four to its service centres in Surat, Israel and Botswana. Its current installed base is now 69. Based on its sales traction, the target deployment of 100 machines by year-end looks very achievable.

Bonus issue to drive liquidity. In order to drive trading liquidity, Sarin has proposed a bonus share issue of 1 bonus share for every 4 existing shares. The listing is subject to approval by the Singapore Exchange.
Maintain BUY, TP raised to SGD2.28. We increase our FY12F-14F net profit forecasts by 15-33% in view of the strong 1Q results. Consequently, our target price goes up to SGD2.28, pegged at 16x FY12F PER. After the bonus share issue, our target price would be adjusted to SGD1.82. We believe that the average EPS growth expectation of 39% pa over FY12F-14F justifies the valuation multiple. Reiterate BUY.