Event
Sarin launched its Light Performance Technology (LPT) system, the Sarin D-LightTM, last week at the Hong Kong Jewellery & Gem Fair 2011. This is a first step towards rolling out LPT as the next revenue driver, after the successful GalaxyTM system. While there are uncertainties in the near term, we remain positive on its long-term prospects. Maintain BUY with the target price adjusted to $1.42, purely for USD/SGD exchange rate changes.
Our View
According to Rapaport, a leading resource for the diamond industry, the Hong Kong jewellery fair attracted an average traffic with a lot of price discoveries going on among buyers and sellers. The polished market hopes for price stability and signs that the demand in the Far East would compensate for any potential sluggishness in the West. With the fourth-quarter holiday season coming up and robust demand emanating from China and India, we do not expect a major falloff in polished sales.
Polished inventories are said to be low and rough inventories, high. This suggests that manufacturing activities should persist in order to meet polished demand. Manufacturers have
long-term interests to invest in yield-enhancing equipment, being the party with the most tightly-squeezed margins in the value chain. Therefore, while equipment sales could face near-term headwinds, we believe any jitteriness would soothe if demand going into the fourth quarter holds steady, giving manufacturers the confidence to invest in capital equipment. In our view, sales momentum for Sarin should still be sustained for 3Q11 while the risk lies in 4Q11.
The market sell-off has prompted Executive Director Avraham Eshed to accumulate 427,000 shares at $0.87-0.91 per share over August-September from the open market. Sarin also engaged in a series of share buybacks from mid-September with 430,000 shares purchased so far at $0.79-0.825 per share, a sign of confidence in the company.
Action & Recommendation
We see no compelling reason to change our revenue forecast for now but we present a sensitivity analysis of our forecast relative to a fall in equipment sales. A 40% drop in equipment sales, for example, would result in our target price falling to $0.96, based on 16x PER. Maintain BUY with a target price of $1.42.
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