Thursday, 27 March 2014

Sarine Technologies

Kim Eng on 27 Mar 2014

  • Rising GalaxyTM penetration and scant competition see Sarine closer to entrenching its monopoly in inclusion mapping.
  • New revenue drivers target the highest value-add segment of the diamond industry, ensuring the next leg of growth.
  • Switch to DCF-based intrinsic valuation model yields higher TP of SGD3.09. Reiterate BUY.
What’s New
In our view, the long-term investment case for Sarine is fundamentally intact. Its GalaxyTM system is on track to become the leading – and possibly the only – automated inclusion mapping system for the world’s rough diamond industry. Sarine LightTM and Sarine LoupeTM are the new pillars of growth and the company expects substantial contributions from both by FY15E.

What’s Our View
Sarine has a game-changing product, effective marketing strategies and the means with which to entrench its monopoly position in the market, paving the way for future success. While we continue to believe in this success, we are wary that near-term R&D and marketing expenses will creep up. We therefore cut our FY14E/15E earnings by 18%/10%, in part also to temper our previous overly-optimistic forecasts. However, Sarine’s near-term earnings fluctuations should not detract from its huge potential for profit (USD91m annual net profit) as its technologies revolutionise current industry practices.

We switch from a P/E-based to a DCF-based valuation method (discount rate: 9.6%, g: 2%) to better incorporate the underlying earnings potential. Our model yields a new TP of SGD3.09 (previously SGD2.16). Implied FY14E/15E P/Es are 26.3x/19.9x. Sarine has no direct peers but diamond miners and retailers trade at an average 32x/22x FY14E/15E P/E. Near-term risk may arise from stake sale by major shareholders due to a possible breakup of the shareholding structure, but we believe that strong fundamentals will carry the day. Reiterate BUY.

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