SINGAPORE (Feb 6): CIMB is upgrading its call on Sarine Technologies to “add” from “hold” previously, with a lowered target price of $1.56.
In a Monday report, analyst Colin Tan says, “We think a lower rough/polished diamond price spread will restore manufacturers’ profitability, eventually leading to better revenue for Sarine as the bulk of its business is still heavily dependent on mid-stream manufacturing activities.”
According to media reports in India, the reason polished prices jumped 3-4% over the last two weeks of Jan 2018 was due to robust demand from domestic and international jewellery manufacturers.
This came on the back of a continued improvement in rough/polished diamond price spread in 2HCY17.
Meanwhile, the group announced last month that it plans to open its first diamond grading lab in Israel in Feb and a second one in India in May.
The new labs will offer a more compelling value proposition as they will employ automated artificial intelligence-based technology in the diamond grading domain, which has been plagued by concerns over accuracy, consistency and security.
With this, the group targets to capture a significant more than 10% share of the diamond 4C certification market in five years, which according to the group’s management is worth about US$500 million ($659.2 million) per annum.
In addition, the group has also launched the Meteorite system in Jan 2018, which is designed to capture the largely-untapped segment of very small (under 0.35 carat) rough diamond stones.
The group believes that this has a market value of about US$25 million.
“We expect sales that have been eroded by illicit competition to gradually recover and margins to be lifted on lower legal costs from 2H18F,” says Tan.
Apart from pursuing legal action against illicit competitors in India that have reportedly eroded sales in 9M17, the group is gaining positive traction in its efforts to discourage customers from using illicit services that infringe on Sarine’s patented technology.
See: Sarine to sue overseas manufacturer for fraudulent misuse of Galaxy system
Moreover, Chilean-based fund Axxion SA is now the group’s largest shareholder, as it increased its stake in the group to 9.18% from 8.7%, over the last two weeks of Jan 2018.
The analyst believes that this shows confidence in Sarine’s overall business outlook and suggests the current valuation offers an attractive risk/reward profile.
“We think the sell-off over the past 12 months (40% decline in share price) is overdone and its current valuation of 15.9 times CY18F P/E is attractive in light of the strong earnings growth outlook amid improving diamond market dynamics,” says Tan.
As at 11.10am, shares in Sarine Technologies are trading 56 cents lower at $1.00 with a dividend yield of 5.0%
