KGI Securities has commenced coverage on mainboard-listed Sarine Tech: U77 0% at “outperform” with a target price of US$0.49, which equates to around S$0.65 and is based on 25 times price-to-earnings of FY2022 earnings per share (EPS) estimates.
The group is due to report its Q1 FY2021 results in the second week of May.
In a re-issued initiation report on Friday (see amendment note), analyst Kenny Tan estimates that favourable price dynamics and an increased rate of market activity will drive Sarine’s sales to rebound by 25 per cent this year as well as see the group’s return to profitability levels similar to 2017-2018. This is because the company’s management expects to continue spending on pushing out its upcoming software offering e-Grading, as well as its new Diamond Journey provenance tracking programme, he said.
The analyst nonetheless does not expect the group to breach US$60 million in sales by 2022, nor profit margins to reach the high-double digits enjoyed by Sarine in the past.
“We like Sarine’s turnaround story, although the return of Covid-19 cases in India could dampen business recovery in the latter half of 2021,” he explained.
In particular, Mr Tan believes the group’s e-Grading software could be a “game changer” in the diamond grading industry, as it allows manufacturers and other industry players to use Sarine’s tools to conduct remote in-house grading. He therefore values the e-Grading business separately at around US$0.30-0.60 per share although this will not be accounted for in Sarine’s target price until KGI observes sufficient adoption rates within the industry, he said.
Mr Tan is projecting Sarine to maintain mid-60 per cent gross margins, as he thinks the group’s sales of its high-margin Galaxy products and downstream Sarine products are likely to be balanced by sales of lower margin products such as Meteorite.
“While sales and marketing, and administrative expenses have been reined in during Covid-19, we expect an increase over 2020 lows as traditional marketing activities are reinstated, and Sarine is likely to continue spending on IP (intellectual property) protection and litigation activities,” said the analyst.
A potential secondary listing on the Tel-Aviv Stock Exchange could also benefit Sarine given increasing institutional investor interest in Israel’s stock market for technological companies, he added.
“Sarine’s share price has more than tripled from Covid-19 lows, and is up 30 per cent year to date (from 43.5 Singapore cents at the close on Dec 30) from the recovery of the diamond industry as well as favourable regulatory enforcement,” observed Mr Tan.
Sarine shares closed flat on Friday at S$0.575.