• Sarine posted a 1Q14 net profit of US$9.1m which beat our expectations on slightly higher than expected number of Galaxy family of systems (~1) and lower than expected expenses
• Total revenue grew 21% y-y and net profit increased 13% y-y
• 15 Galaxy family of systems were delivered, bringing total installed base to just under 160
• Sarine Loupe is expected to commercialize in 3Q14
• Upgrade to "BUY”, with a revised TP of S$3.14 based on our DCF valuation (WACC: 10.3%)

What is the news?

Sarine Technologies Ltd announced its 1Q14 results on 11 May 2014. Sarine reported a net profit of US$9.1m, an increase of 13% y-y. Top line grew 21% y-y to US$24.3m. 15 Galaxy family of systems were delivered this quartered, out of which 14 were to customers and 1 to their new New York service center. This helped to boost their recurring revenue and gross profit margins consequentially. Recurring revenue accounts for about 30% of total revenue and gross profit margins improved to 73%. Balance sheet remains healthy and robust with no debt and net cash balance at US$42.7m. Marketing efforts for Sarine Light are well underway for US, Taiwan and Korea and will expand to HK and China and subsequently to SEA markets late this year or early FY15. Sarine Loupe has successfully completed tests in India and feedback was very positive from their customers. As a result, it will be offered initially in India on a progressive roll out basis with full commercialization expected in 3Q14.

Investment Action

We remain very positive on Sarine for its 1) unique technological advantage 2) near monopolistic position 3) superior margins 4) debt free net cash balance sheet and 5) potential growth story. This quarter has proven again the increasing traction and value proposition Sarine provides to the midstream diamond manufacturers with its Galaxy family of systems and planning solutions. We remain upbeat about the potential growth story from the success of the Sarine Light and Sarine Loupe as mentioned in our previous initiation report. We continue to believe that Sarine Loupe will take off much faster as the target market constitutes existing customers. The success of the commercialization and take up rate will see boost to recurring revenues and margins. Other than finetuning the expected effective tax rate to account for the increase in corporate tax rate in Israel, our forecasts remains unchanged. R&D and SG&A margins have come down slightly this quarter but we still expect FY14 expenses to be higher on the back of increased marketing efforts and R&D. Some key risks we would like to highlight would be the shortage of available credit line in India to diamond manufacturers which might dampen sales and large divergence in the rough and polished diamond spreads.

We trim our earnings forecasts and TP downwards slightly to factor in higher tax expenses and exchange rate movement. With the recent price correction over the last few weeks, Sarine’s valuation is very undemanding and we upgrade Sarine to a “BUY” rating based on our DCF valuation (WACC: 10.3%) with a revised TP of S$3.14.

Source: Phillip Securities Research - 14 May 2014