Sarin Technologies (KimEng)

Event: We initiate coverage on Sarin Technologies with a BUY recommendation and target price of $0.91, based on 14x FY11F PER. Sarin has recovered by leaps and bounds from the global financial crisis with a 617% jump in EPS in FY10.However, this is more than a recovery story. A unique leadership position, a new revolutionary product and a change in business model put the group in a sweet spot to benefit from the growing demand in the diamond industry.
"My reason for choosing diamonds is that, dense as they are, they represent the greatest worth in the smallest volume.”– Fashion icon Coco Chanel

Our View:
- A market leader in precision technologies for diamond and gem processing, Sarin holds an estimated two-thirds share of this field globally. Its broad customer base is the envy of many players, with reputable names such as Tiffany & Co, GIA, AGS, BHP Billiton forming part of the list.

- Sarin owns the technology behind the revolutionary Galaxy TM machines, a first in the industry that allows accurate mapping of a diamond’s inclusions within minutes. This technology is changing the whole ball game of the industry with its acceptance gaining traction as we speak.

- De Beers has touted the next 10 years as The Diamond Decade. The industry is benefiting from a recovering US market, which accounts for 40% of global demand. Add the increasingly affluent consumers in China and India that are developing a taste for luxury items like diamonds and demand is poised to grow by double digits in the medium term.

Action & Recommendation: A change in business model is improving the earnings quality as Sarin seeks to build more recurring income. We expect EPS to grow at a CAGR of 25.3% over FY11F-13F. Trading at 11.4x FY11F PER, the stock looks even more attractive at ex-cash PER of 9.4x; Sarin is a gem waiting to be scooped up. Initiate with BUY and target price of $0.91.