Sarin Technologies (KimEng)

Event

Following our initiation report, Sarin’s share price has shot past our previous target price of $0.91 within a month. We were conservative in our valuation considering the illiquidity of the stock prior to our coverage. We may have been overly reserved and Sarin is deserving of a higher valuation. We hike our PER multiple from 14x to 16x, given that the growth momentum has gained traction, and roll over our multiple to FY12F earnings. Our target price is consequently increased to $1.38. Reiterate BUY.

Our View

Arjav Diamonds (India) Pvt Ltd is conducting India’s first-ever online auction of rough diamonds and would be supplying GalaxyTM 1000 automated inclusion mapping output data to potential bidders. BHP Billiton has earlier adopted the same system to aid in its sales process and the provision of such information has given bidders higher confidence to bid. This seemed to have helped BHP Billiton command higher premiums for its rough diamonds.

The longer-term implication is that De Beers may eventually adopt the same system in its “sights”. Being the largest diamond miner, an endorsement by De Beers would naturally set an industry standard and catalyse the use of the Galaxy system in the diamond industry. This, in

turn, would provide a major lift for Sarin. Separately, the two initial launch customers of the GalaxyTM 1000, Venus Jewel and Shree Ramkrishna Export of India, have each placed repeat orders for a second Galaxy machine.

Dharmanandan Diamond of India has also committed to acquire 10 Quazer II and three Strategist laser cutting systems. We believe that an important consideration Dharmanandan Diamond made before its commitment is the seamless connectivity of Sarin’s suite of machines with the Galaxy system. In the light of this major order, FY11 earnings would be positively boosted. We also expect more manufacturers to eventually switch to Sarin products during their product renewal cycle.

Action & Recommendation

We had postulated that Sarin could be a $3.26/share stock in more than five years. With these positive developments, this target could be achieved earlier than imagined. Our net profit forecasts for FY11-13F are revised upwards by 3-11%. We have also reviewed our valuation multiple and believe that Sarin deserves a higher premium as its growth momentum starts to gain traction. Reiterate BUY with a higher target price of $1.38, based on 16x PER on revised FY12F EPS.