DBS Group Research has started Sarine Technologies at “fully valued” due to the headwinds in the diamond industry.
It has also pegged a target price of 45 cents, which is based on an average of the one-year forward P/E at 15.5x FY2022 earnings and a peer P/E of 15.0x FY2022 earnings.
Calling his recommendation “fully justified”, analyst Sachin Mittal says the normalisation of Sarine’s growth, as well as the time needed for downstream contributions to materialise, are also contributing factors to his call.
Despite Sarine’s exceptional growth in the FY2021, Mittal says the remarkable growth rates are unlikely to be sustained. To be sure, the rate of growth in 2021 was caused by several factors such as higher rough and polished spreads, a low base effect from 2020, lockdown-induced demand for luxury goods caused by border restrictions, and an urge for emotional gifting in tough times.
“In addition, the favourable rough and polished spreads experienced in late 2020 and early 2021 were due to the varied responses of the rough and polished markets to the pandemic,” writes the analyst in his March 11 report.
“We do not expect the same growth rates going forward… As governments worldwide cut down on stimulus payments, inflation rates soar, and travel resumes, it is likely that industry conditions in 2022-2024 will normalise and Sarine’s revenue and net income will also moderate. In fact, we have already observed some moderation in 2HFY2021,” he continues.
See also: Test debug host entity
In addition, Mittal expects to see further weaknesses in Sarine’s revenue lasting at least till 1QFY2022 on the back of the faster growth in rough diamond prices, compared to that of polished diamonds.
“When rough prices rise faster than polished prices, the margins of midstream manufacturers are eroded. In light of weakened profits and suboptimal industry conditions, midstream manufacturers likely delay capital expenditures which, in turn, translates to lower capital equipment sales for Sarine,” writes Mittal.
“Examining Sarine’s quarterly revenue and the difference between the rough and polished indices, we see that relationship holding true. Notably, there appears to be a time lag of a few months, with the difference in the rough and polished indices being a leading indicator of Sarine’s revenue,” he adds.
See also: Maybank downgrades ComfortDelGro in contrarian call over Addison Lee acquisition worries
Going into 2022, Mittal expects that the supply of rough diamonds will remain tight.
According to analysis from Rapaport, which does research and covers news pertaining to diamonds and diamond prices, the inventory for rough diamonds was said to have “depleted significantly” in 2021.
“This suggests that there will be fewer rough diamonds available in the market in 2022 if rough production does not increase significantly,” writes Mittal.
In his report, Mittal has estimated an FY2022 revenue of US$57.2 million ($77.7 million) as well as a net profit of US$7.78 million.
In comparison, Sarine reported total revenue of US$62.1 million for the FY2021 and net profit of US$16.3 million.
As at 12.28pm, shares in Sarine are trading flat at 51.5 cents, or an FY2022 P/B of 1.9x and dividend yield of 5.3%.
Photo: Stock image
