Tuesday, 12 August 2014

Sarine Technologies

Kim Eng on 11 Aug 2014

  • 2Q14 net profit of USD8.6m (+3.5% YoY, -5.6% QoQ) in line.
  • 19 GalaxyTM systems delivered in 2Q14, bringing installed base to 176.
  • With TP reached, cut to HOLD from BUY. DCF-based TP raised marginally to SGD3.16 from SGD3.09 after rollover.
Record 1H14 net profit
2Q14 net profit of USD8.6m (+3.5% YoY, -5.6% QoQ) lifted 1H14 net profit by 8.0% YoY to a record USD17.6m. This formed 55% of our FY14E forecast. The strong results came from higher equipment sales. The second-half is seasonally weaker due to the Diwali holidays in India. Nineteen more GalaxyTM/SolariesTM systems were deployed in 2Q14 (1Q14: 15, 2Q13: 17), bringing its installed base to 176 units. 2Q14 gross margins were generally steady at 71.6%, though EBIT margins dipped 3.8ppts QoQ on higher marketing expenses for product launches, as guided previously.

Await further product penetration
Some 35% of its 1H14 revenue was recurring, up from 30% in 1Q14. This further improved its earnings quality. Sarine remains confident of its 2H14 prospects, given: 1) stable INR/USD exchange rates; 2) a stable spread between rough and polished diamond prices (divergence negative for Sarine); and 3) no meaningful competition. It continues to market Sarine LightTM and Sarine LoupeTM, with revenue contributions of above 5% expected fromFY15E.

We cut FY14E-16E net profits by 1.9% as we raise effective tax rate assumptions from 15.0% to 16.5%. Our DCF-based TP has been raised to SGD3.16 (WACC: 9.6%, LTG: 2%) as we roll over to FY15E. However, with TP reached, downgrade to HOLD as we believe valuations are fair. There could be earnings surprises if GalaxyTM, Sarine LightTM and Sarine LoupeTM achieve faster-than-expected penetration or if new products are successfully launched, unlikely before 2016.

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