• FY14 revenue/net income growth of +14.9%/+14.0% y-y to US$88m/US$27m but net income missed consensus/PSR estimates by 7%/10%
• 7 Galaxy family of systems delivered (mostly Solaris which is of lower upfront sales), bringing total installed base to 190. YTD deliveries of 48 machines missed our FY14 estimate of 51 machines
• FY14 dividend of US 5.0 cents and semi-annual dividend +25% to US 2.5 cents for FY15
• Upgrade to “BUY” with a revised TP of S$3.30. Despite immediate headwinds in the diamond industry, we believe the situation should rebalance by 2H15. Combining Sarine Loupe and Light capabilities into the Sarine Profile could hold the key to their next growth stage

How do we view this?

Net income missed expectations on subdued diamond industry backdrop... In light of a subdued backdrop highlighted during 3Q14, a cocktail of inventory level build-ups on the manufacturers, Debeers increasing rough prices, reduced credit lines and a slower than expected Christmas, there were less manufacturing output and these reduced demand for Sarine’s products and services as we had expected. The miss were largely due to a change in product sales mix (lowering margins) and lower number of machines sold

…Industry overhang might persist into 2Q15… January proved to be a poor one for rough diamond sight (30% less than average) and reduced credit lines in India still has not eased. We expect a slower 1Q15 ahead with less output and holding off of orders for Sarine’s machines and services

…but we expect a turnaround/improvement by 2H15... As inventories lower together with correction of rough diamond prices, rough vs polished price spreads should normalize again with US consumer demand improving and we will see a recovery in the industry. Industry checks reveal that India rough imports in Jan decreased by ~32% which could encourage Debeers to reduce their pricing, albeit not in next week’s sight. US jewellers have also reported decent Valentine’s Day sales. Most eyes especially polished buyers will be on the March HK trade show

Unlocking the next growth phase. Sarine will be bundling the Light and Loupe which we were very positive on and introducing the Sarine Profile as an essential marketing tool for polished diamond trade. We believe this holds the key to Sarine’s next growth stage (which we touched on in our initiation report) as it potentially eliminates the ambiguity, “non-visual” and manual process in diamond trading. We will model contributions in once we have more clarity on the commercialization timeline and industry reception (and for the Allegro system for non-diamond gemstones as well).

Investment Actions

Sarine has cutting edge, unique technological solutions for the diamond manufacturing industry with no meaningful competitors. Long-term diamond industry fundamentals are strong and we expect significant improvements once the subdued backdrop turns around. Upgrade to "BUY” with a revised TP of S$3.30

Source: Phillip Securities Research - 24 Feb 2015