Sarine Technologies (SARINE SP)
Updated 14 May 2021
Good start to 2021
- Sarine’s 1Q21 results came in strong, with sales around 34% our full-year estimate and net profit exceeding our full-year estimate.
- Traction across most fronts. While Galaxy-family sales were fairly low, system sales were in the higher end of the Average Sale Price. The return of diamond processing activity in 1Q21 is also encouraging, while Sarine saw developments for Diamond Journey, e-Grading and the synthetic diamond space as well.
- Maintain OUTPERFORM with higher TP of S$0.82. With a worsening COVID-19 situation in India, it may be difficult to read the tea leaves on how business activity will be like for the rest of 2021. We model our expectations on the basis of a normalization of business activity in 2022.
1Q21 sales of US$17.3mn is the highest since 2Q18, while net profit of US$6.7mn is the highest since 2Q14.
Despite the low sale count of Galaxy systems in 1Q21, Average sale prices of the machines are towards the higher end, as a total of 7 Galaxy/Solaris models were sold.
Sarine also made progress with Diamond Journey and e-Grading, after announcing partnerships with the likes of HB Antwerp, QVC, and some early tests with Indian manufacturers.
Forecasts
We raise Galaxy ASP estimates to account for the one-off sales business model, and trim COGS% to account for the improved gross margins in 1Q21. We take Galaxy sales to account for around 35% of product sales now, instead of 20% prior, and reduce Meteor/Meteorite sales estimates across the board, leading to 100/125/140 Galaxy system sales for FY21F/22F/23F respectively. We trim marketing expenses to be in line with 2020, and admin expenses to be more in line with 2019, while reducing tax estimates. Our net profit margins are now 21.8%/13.9%/14.0% for FY21F/22F/23F respectively after the adjustments.
Valuation & Action
Maintain OUTPERFORM, with increased Target Price to S$0.82.
We note that while 1Q21 results has displayed potential for a return to strong double digit profit margins, our valuation of Sarine in 2022 assumes a normalisation of business activity and thus, an increase in expenses to match.
Risks
Worsening of COVID-19, which will disrupt working conditions within the industry. Growing synthetic diamond industry. Forex risks.
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