• Sarine posted a 3Q14 net profit of US$5.7m and 9M14 net profit of US$23.3m, which was up 84.6% and 20.1% y-y respectively.
• 9M14 net profit forms ~77% of PSR’s FY14 estimates and 3Q14 net profit was slightly lower by 34% q-q in line with the seasonally weaker 3Q as we previously mentioned
• 7 Galaxy family of systems were delivered, bringing total installed base to just under 185. YTD deliveries of 41 machines forms ~75% of our FY14 estimates of 55 machines
• Resiliency of their recurring revenue model is a key positive as it has shielded them from volatility in sales caused by a few India itches
• Maintain at "Accumulate” with an unchanged TP of S$3.27 based on our DCF valuation (WACC: 10.3%)

What is the news?

Sarine Technologies Ltd announced its 3Q14 results on 10 Nov 2014. Sarine reported a net profit of US$5.7m, an increase of 84.6% y-y. Total revenue grew 17.4% y-y to US$20.4m. 7 Galaxy family of systems were delivered this quarter, the majority of which were Solaris machines. Recurring revenue accounts for 35% of total revenue and gross profit margins remain high at 70%. Balance sheet is healthy and robust with no debt and net cash balance at US$40.7m. The Sarine Loupe was showcased in the September HK show with additional features implemented where it was received with overwhelmingly feedback. The Light and the Loupe will be marketed for sales as both standalone and joint packages due to their complimentary services which Sarine hopes to capture wider commercial adoption. Significant revenue contribution is expected in 2015.

Investment Action

We remain confident on Sarine’s merits of

1) unique technological advantage

2) near monopolistic position

3) superior margins

4) debt free net cash balance sheet and

5) potential growth story that has taken its infant steps. 9M14’s performance has shown the resiliency of their recurring revenue model as it has shielded them from the volatile nature of selling capital goods in the past.

There are however a few temporary downside risks to note.

1) Tightening of credit lines to Indian diamond manufacturers from banks in Belgium and India have created headwinds for sales of the Galaxy family of systems which could last till the early part of 2015.

2) An increase in inventories of polished diamonds together with price reductions might also be a slight drag on diamond scanning activities by their customers.

We see this as a temporary issue but to err on the conservative side, we have reduced our full year deliveries forecast to 51 machines and FY15 to 55 machines, translating to ~10 machines for the last quarter. Our FY14/FY15 EPS is thus trimmed by ~2%/2%. There is still no meaningful competition in the market currently.

We continue to be positive on the Loupe and Light holding the key to their next growth stage which we expect to model in next year once it reaches significant contribution. Key re-rating catalyst would be a gain in traction of these 2 products, especially the Loupe. Despite the trim in estimates, we maintain Sarine at an “Accumulate” rating based on our DCF valuation (WACC: 10.3%) with unchanged TP of S$3.27 with a strengthening USD.

Source: Phillip Securities Research - 11 Nov 2014