Maybank Kim Eng Research analyst Eric Ong has started “buy” on Sarine Technologies with a target price of 70 cents, representing a 19% upside on the stock as at his report dated May 28. 

Ong’s “intrinsic value implies 17.9 times FY2021 price earnings (P/E) and 14.4 times FY2022 P/E, compared to over 20 times during the previous upcycle.”

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Ong expects “Sarine to post cyclical earnings uplift in tandem with the recovery of the global diamond industry. The successful dual listing on Tel-Aviv Stock Exchange by 2QFY2021 and better-than-expected adoption rate for its e-Grading could further catalyse the stock.” 

Sarine’s e-Grading is currently in beta-testing with two leading Indian manufacturers, and on track for its introduction to the market later this year and thus, Ong conservatively assumes “the group is able to capture just 1% of US$500 million market size of diamond grading in its FY2022E top-line.”

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Ong observes that a “strong rebound in manufacturing activities which started in 4QFY2020, is continuing in 2021”, with the group expecting to see “significant deliveries of Galaxy family systems in 2021, with some backlog of orders delayed in 1QFY2021 due to lingering pandemic-related logistical issues.”

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The growing demand for lab-grown diamonds(LGDs) is expected to benefit Sarine who has “already generated revenues from this niche segment as its manufacturing-related, grading and retail/ branding technologies are all applicable to LGD.”

However, Ong notes there are downside swing factors to consider, “resurgence of the pandemic could disrupt global diamond value chain due to worldwide restrictions and lockdowns”, “economic uncertainty may reduce consumer spending on diamond jewellery, this leading to less polishing and retail activities” or “infringement of the group’s intellectual property rights.”

As at 1.55pm, Sarine Tech shares stood 1 cent higher or 1.626% up at 62.5 cents, or 2.4 times P/B, according to Maybank Kim Eng’s estimates.