2Q13 above expectations, reiterate Buy, TP upgrade to SGD1.86. 2Q13 results were slightly ahead of our expectations with net profit of SGD8.3m (+26% YoY, +3% QoQ). 1H13 net profit made up 53% of our previous FY13F forecast. Sarin also declared higher-than-expected dividends with 1.5 US cts/sh interim and 2.5 US cts/sh special. We see the possibility of a similar level of dividends in 2H13, implying FY13F yield of 6.5%. We roll forward our valuations to blended FY13F/14F earnings maintaining a 15x PER multiple. Consequently, our TP is raised to SGD1.86, implying 21% share price upside. Maintain Buy.

Accelerated GalaxyTM sales. As expected, sales of GalaxyTM were exceptionally high in 2Q13 due to pent-up purchases that weer put off in 1Q13 by several India customers. A total of 17 units were installed in 2Q13 (9 units in 1Q13), bringing accumulated GalaxyTM installed units to 122 units. We forecast total installed base to reach 144 by endFY13F. Recurring revenue now forms just under 30% of total 1H13 revenue, providing an increasingly steady support to earnings.

3Q13 could be weaker QoQ, but not as bad as last year. Sarin is generally upbeat on long-term prospects, but cautions that 3Q13 performance could be weaker QoQ due to macroeconomic challenges in China (decelerating growth) and India (devaluation of rupee), as well as the narrowing of spread between rough and polished diamond prices. These factors could temporarily dampen equipment spending due to credit tightness and suppressed end-consumer demand. However it qualifies that this would not be as severe as what we saw over the same period last year when revenue fell 40% QoQ in 3Q12. Our core forecasts are thus largely intact despite the 2Q13 beat. Our FY13F earnings are however reduced by 9.4% mainly because Sarin will recognise an income tax charge of USD2.5m in 3Q13 to release “exempt profits” (see pg 2 for details).

Possibility of higher dividends in 2H13. Following the potential release of USD30m in “exempt profits”, and the surprise 1H13 interim dividends, we think that there is a possibility that Sarin could pay more in final dividends. We have raised full-year dividend forecast to 8 US cts/sh, which would imply a yield of 6.5%.

Source: Maybank Kim Eng Research - 6 Aug 2013