Sarin – Kim Eng

Focus on long-term structural growth

Softer 3Q12 than we expected. Although we were expecting weak 3Q12 numbers, the decline was greater than what we anticipated. Revenue came in at USD11.7m (-26% YoY, -35% QoQ) with corresponding net profit of USD2.5m (-41% YoY, -62% QoQ). 9M12 net profit made up 64% of previous FY12F forecasts. We have advocated looking beyond FY12 numbers previously so this set of weak results is not too much of a concern. Maintain Buy with TP reduced to SGD1.57.

What happened this quarter? Sales in 3Q12 were affected by weak demand from Indian manufacturers as they put off capex spending. This was mainly due to two key reasons: (1) High rough diamond prices, coupled with short-term weakness in polished diamond prices erode manufacturers’ margin and (2) Indian manufacturers face liquidity and credit line issues. Sales of GalaxyTM were also affected, as only 5 were sold this quarter (compared to 13-14 in the preceding 2 quarters). Sarin also warned that it may miss its target of 100 installed GalaxyTM machines by year end given that it has only 88 as at 3Q12.

Signs of easing. There are however positive signs emerging from (1) DeBeers’ 10% cut on rough diamond prices, and (2) holiday buying of polished diamonds, which should aid in the recovery of the Indian manufacturing sector as liquidity issues dissipate.

Structural growth story intact. We believe that inherent demand for GalaxyTM has not abated but is temporarily subdued by customers’ financial positions. We see potential for resumption of sales momentum towards end 4Q12. Progress of its polished diamond products could see some breakthrough in end 4Q12 if it manages to establish commercial agreements with major industry opinion leaders for its Sarin-Light product.

Maintain Buy. We cut FY12F net profit forecast by 16% on weaker 3Q12 numbers and trim FY13-14F figures by about 5-7%. Growing recurring revenue base (25% of total revenue for 9M12) from GalaxyTM has improved quality of earnings and helped reduce volatility. We remain positive as we believe that the adoption cycle of Galaxy is still in its early stage. Maintain Buy, TP reduced to SGD1.57 pegged at 13x
FY13F PER.

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