Sarin Technologies Ltd (KimEng)

Event

Sarin reported a record quarterly net profit of US$5.0m (+8% YoY, +51% QoQ) on revenue of US$15.6m (+9% YoY, +27% QoQ). The results were slightly ahead of our forecasts with 1H11 revenue and net profit making up, respectively, 49% and 53% of our FY11 forecasts. An interim dividend of US 1.25 cents per share was also declared, higher than the fixed dividend policy of US 1.0 cent per share every half-yearly that it committed to earlier. Maintain BUY with a lower target price of S$1.34 due to the weaker US$.

Our View

Improved market conditions in 1H11 drove broad-based demand for Sarin’s products, along with accelerating sales of GalaxyTM related and QuazerTM II related products. Ten GalaxyTM systems were delivered in 2Q11 and six in 1Q11. The total number of installed Galaxy machines stood at 37 as at 1H11. This is on track to meet Sarin’s target to more than double the installed base of 21 Galaxy machine as at end-FY10. GalaxyTM related revenue for 1H11 has reached 25% of its total revenue, of which half of this was recurring in nature.

It is too early to assess how the current economic turmoil could affect the diamond industry. Management said there are no adverse indications yet. Diamond jewellery markets in China and India are expected to grow at 20% this year, following last year’s growth of 25% and 31%, respectively. The demand in the US was also unexpectedly strong prior to the current market fallout. In the absence of any negative industry signals, we are keeping most of our forecasts intact for now.

Towards end-3Q11, Sarin plans to launch a Light Performance Technology (LPT) product, the Sarin D-LightTM, targeted at manufacturers, gem labs and retailers. We expect contribution to the topline from 4Q11 although the amount may not be significant yet. Over the longer term, we believe the market potential for LPT could reach as much as US$50m a year.

Action & Recommendation

We raise our FY11F net profit by 6% following the record quarter but maintain our FY12-13 forecasts. Our target price is still based on 16x FY12F PER but is lowered to S$1.34, from S$1.38, after accounting for the translation loss due to the US$ depreciating against the S$. Maintain BUY.