SINGAPORE (Feb 27): CIMB is sticking to its "add" call on Sarine Technologies after the company sold 11 Galaxy family systems in 4Q17, bringing the total installed base to 345 Galaxy family systems as at December.
Compared to the sale of just two machines in 3Q17, CIMB views this as an improvement and possible recovery in growth.
"Management believes there is still upside to sales of higher-value Galaxy machines this year, and the newly launched Meteorite systems could drive equipment sales ahead," says analyst Colin Tan in a Monday report.
Tan says the midstream segment of diamond industry has turned more positive with polished inventories reduced ahead of Valentine’s day and the Lunar New Year.
First diamond sight of 2018 by De Beers yielded robust US$665 million sales, higher than each of the prior nine sights (US$376 million-US$586 million) in 2017, though this was partially driven by seasonality. Rough prices were largely flat but Tan expects a return to normalised manufacturing activities in the midstream.
Although illicit competition is expected to continue for another two quarters and affect sales of Solaris and Meteor systems for smaller stones, Sarine is turning more optimistic that the illicit use of its patented technology has started to abate.
Apart from lawsuits and software upgrades from older hacked versions, key US retailers are cooperating in prohibiting polished diamond imports that contain infringing goods from errant manufacturers. This given the US was the largest diamond import market in 2016 at US$24 billion.
Meanwhile, Sarine Technology Lab, which opened on Feb 18, offers an automated solution to provide consistent and reliable AI-based 4C grading of polished diamonds, along with an integrated enhanced Sarine Profile that provides other aspects like light performance and traceability of a diamond from a rough to polished state.
"We think this one-stop package offering could fuel growth in trade revenue in the retail business, which accounted for 2% of total revenue in FY17," says Tan.
Management also stated that Sarine has at most negligible exposure to Firestar Diamonds, the company that is linked to Nirav Modi, who is reportedly at the centre of the US$1.8 billion ($2.4 billion) diamond fraud scandal involving Punjab National Bank in India.
"However, we expect higher scrutiny of Indian banks extending credit to diamond manufacturers/traders in the near-term, which could hamper upside to mid-stream manufacturing activity," says Tan.
DPS of 1.5 US cents was declared for the quarter, bringing total FY17 DPS to 3.5 US cents.
CIMB is lowering its FY18-19 EPS slightly by 1-2% to reflect lower recurring sales volumes from total installed base of Galaxy family systems.
"Our target price is lowered to $1.53 accordingly, based on 17.2 times CY19 earnings which is at 10% discount to its historical nine-year average," says the analyst.
As at 10.23am, shares in Sarine Technologies are down 1 cent at $1.17.
