KGI Research analyst Kenny Tan has kept “outperform” on Sarine Technologies with a higher target price of 82 cents from 65 cents previously.

The positive recommendation comes as Sarine Tech posted sales of US$17.3 million ($23.1 million) for the 1QFY2021 ended March, which stood around 34% of Tan’s FY2021 estimate.

As it is, the company’s net profit of US$6.7 million for the 1QFY2021, has already exceeded Tan’s FY2021 estimates.

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“We note that while 1QFY2021 results have 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,” writes Tan in a May 14 report.

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In the same quarter, Sarine Tech saw fairly low sales for its Galaxy systems, albeit with system sales in the higher end of its average sale price (ASP), says Tan.

For reference, Sarine sold 11 of these models in 2020, 0 in 2019 and 14 in 2018.

“While Sarine did not provide recurring and nonrecurring revenue breakdown, we expect recurring revenues to have driven the bulk of 1QFY2021 sales, as Sarine’s machines map an average of close to 95k stones/day,” he writes.

“The return of diamond processing activity in 1QFY2021 is also encouraging, while Sarine saw developments for Diamond Journey, e-Grading and the synthetic diamond space as well,” he adds.

Tan is also buoyant on Sarine’s prospects following its partnerships with HB Antwerp, QVC, as well as some early tests with Indian manufacturers.

SEE:Sarine Technologies posts 1Q net loss of US$1.4 mil

“Sarine has also made inroads in the lab-grown diamond (LGD) space with a partnership that will allow the company to better understand their tools’ value-add to the LGD space and fine tune their business model to suit the economics of LGD,” he says.

Tan has thus raised Galaxy’s ASP estimates to account for the one-off sales business model and trim COGS% to account for the higher gross margins in 1QFY2021.

“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 FY2021/2022/2023 respectively,” says Tan.

“We trim marketing expenses to be in line with 2020, and admin expenses to be more in line with 2019, while reducing tax estimates,” he adds. “Our net profit margins are now 21.8%/13.9%/14.0% for FY21F/22F/23F respectively after the adjustments.”

As at 12.56pm, shares in Sarine are trading flat at 57 cents, or 2.9 P/B according to KGI’s estimates.