Monday 18 March 2013

Sarin Technologies

Kim Eng on 18 Mar 2013

Bright future prospects, maintain Buy. Sarin’s share price surged by 17% to a high of SGD1.465 over 3 weeks after its 4Q12 results before retreating lower. We believe that the optimism displayed was a reflection of increased confidence in Sarin’s future prospects and to a lesser extent, a reaction to the improved 4Q12 numbers. We spoke to management on plans for Sarine-Light when they were in Singapore in end-Feb and were pleased with its developments. Maintain Buy, TP unchanged at SGD1.48.

Rough prices rising faster than polished. In the rough diamond market, DeBeers’ February Sight closed with an estimated sale of USD550m. Rough diamond prices increased by about 4% from the previous Sight, after falling by about 12% in 2012. Without a corresponding increase in polished diamond prices, this may not bode well for manufacturers as the price differential between rough and polished narrows.

Short-term pain or long-term gain. Given that manufacturers’ margins are the most tightly squeezed, a narrowing price gap would be detrimental to short-term liquidity, and would affect short-term capex spending decisions. However, we believe that it should also trigger the motivation to seek long-term improvements in margins by investing in value-adding technologies such as those offered by Sarin.

Hong Kong Jewellery show well-received. According to Rapaport, the recent Hong Kong Jewellery Show ended on 9 March with much better business than a year ago and exceeding most expectations. This supports the cautiously positive outlook for luxury goods despite the uncertainties in the global economy. While there are no signs of increase in polished diamond prices yet, we think that an improved demand may shift pricing power to the retailers. Furthermore, a rise in rough diamond prices would also trigger manufacturers to seek higher prices. These factors may eventually push polished prices higher. This should support Sarin in marketing its Sarine-LightTM.

Sarine-light - slow takeoff but strong earnings later. We think that the Sarine-light may take some time to take off but once endorsed by the industry, could form a strong recurring income source for Sarin.

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