Sarin – Kim Eng
Early signs of easing
De Beers cut rough diamond prices. In the last DTC sight in August, De Beers reduced rough diamond prices by an average of 8%. As a result, all rough diamonds were taken up by sightholders, compared to more than 20% rejections in the previous two sights. Based on a Rapaport report, the cut in rough prices narrowed the gap between rough and polished price movements from about 15% to 5%. This is a positive move for the industry as it would ease liquidity challenges and profit margin pressures for manufacturers.
Polished prices more stable. Polished diamond prices were more stable in August, following steep declines in previous months. There should be gradual improvement in demand ahead of the fourth-quarter buying season. Demand for lower-quality and cheaper diamonds appears steady while that for high-quality stones is still relatively weak. All eyes are on the Hong Kong jewellery show in late September, which would give a clearer indication of polished buying demand.
Indian manufacturers still face liquidity problems. While there is an improvement in sentiments, given the added burden of a weak rupee, Indian manufacturers are still plagued with liquidity issues. We do not expect these manufacturers to resume capital equipment purchase until further signs of easing as they remain cautious. However current developments are moving in the right direction.
Look for growth beyond FY12. We maintain our view of looking for the next leap of growth for Sarin beyond FY12, which would come from the penetration of the polished diamond market. Meanwhile, we are not even midway through the adoption cycle of the Galaxy, which would drive recurring revenue to reach about 30% of total revenue by FY13F.
Current valuations a steal, reiterate BUY. Current depressed stock price offers a good opportunity for accumulation. While Fidelity trimmed its position from 6.2% to 4.8%, Sarin has bought back 0.3m of its own shares recently at SGD0.90-0.92, demonstrating its confidence in the company. We lower FY12F net profit by 4.4% as we incorporate more conservative 3Q12 numbers. We roll forward our valuation multiple onto FY13F earnings and our target price is marginally higher at SGD1.68, peg to 13x peer average forward PER.