Sarin Technologies (KE)

Event

Sarin reported 3Q11 revenue of US$15.9m (+89% YoY, +2% QoQ) and net profit of US$4.3m (+415% YoY, -15% QoQ). The results were within our expectation with 9M11 revenue and net profit both making up 75% our full-year forecast. The company delivered another 10 of its revolutionary GalaxyTM systems during the quarter, while continuing to enhance its product offerings. A special interim dividend of 1.0 US cent per share was declared. Reiterate BUY with a target price of S$1.41.

Our View

Positive sentiments in the industry continue to drive increased sales of GalaxyTM-related and QuazerTM-related machines in 3Q11. The sequential 5.2ppt decline in net margin was attributed to different revenue mix and higher tax expense associated with the appreciation of the US dollar against the Israeli shekel. We do not see this as a major cause for concern.

GalaxyTM-related sales for 9M11 now make up about 25% of total revenue where approximately half of this is recurring in nature. Sarin delivered another 10 GalaxyTM machines in 3Q11 and has more than doubled its installed base to 47. It also continues to expand its product offerings with the launch of a new product DiaMarKTM HD last week, together with the acquisition of a new diamond imaging technology, termed D-See technology. We see this as continual innovation to stay ahead of the competition.

In our previous report, we mentioned that performance for 3Q11 should be sustained and risk is in the fourth quarter. As expected, Sarin emerged unscathed in the third quarter. Our view of higher risks in the fourth quarter due to economic uncertainty remains. Additionally, 4Q is seasonally weaker. Sarin is equally cautious and has highlighted such risks in its outlook statements. However, we believe that such uncertainties are short-term in nature and remain optimistic about its long-term prospects. Anecdotal evidence suggests that the demand for diamonds in China and India is still holding strong although there are some price pressure.

Action & Recommendation

We cut our FY11 net profit forecast by 3% to take into account a weaker 4Q but maintain our forecasts for FY12-13. We expect another 1.25 US cents final dividend in 4Q, which would translate to FY11F yield of 6.2%. Reiterate BUY with a target price of S$1.41 based on 16x FY12F PER.