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Sarine Technologies (SARIN SP) Summary

Core Content

Sarine Technologies is a Singapore-based company operating in the industrials sector with a market capitalization of USD667M and a share price of SGD2.44. The target price (TP) has been raised to SGD3.09 (+27%), reflecting the company's strong potential and the switch from a P/E-based to a DCF-based intrinsic valuation model. The DCF model uses a discount rate of 9.6% and a growth rate of 2%, leading to a more accurate assessment of its long-term value.

Main Points

• Market Position: Sarine is positioned to entrench its monopoly in automated inclusion mapping technology with the Galaxy™ system. It is also expanding into the polished diamond segment with Sarine Light™ and Sarine Loupe™, which are expected to be significant revenue drivers.

• Product Innovation: The Galaxy™ system is the core of Sarine's business, with a projected installed base of 420 units by FY18E. The Solaris™, a smaller version of the Galaxy™, is also gaining traction in the market.

• New Revenue Streams: Sarine Light™ and Sarine Loupe™ are new products targeting the polished diamond segment, which is a high value-add area in the diamond industry. These products are expected to contribute significantly to the company's revenue and profit from FY15E onwards.

• Financial Performance: Sarine has shown consistent revenue growth over the past few years, with core net profit expected to increase from USD20.8M in FY13A to USD32.2M in FY14E and USD42.6M in FY15E. The company's net profit margin is projected to rise due to the increase in recurring revenue, which has a high gross margin of 95%.

• Valuation: The DCF-based valuation model provides a higher TP of SGD3.09 compared to the previous P/E-based TP of SGD2.16. The implied P/E ratios for FY14E and FY15E are 26.3x and 19.9x, respectively. These are lower than the average P/E ratios of diamond miners and retailers, which are 32x and 22x.

• Growth Forecasts: Sarine's net profit is forecasted to grow at a CAGR of 25% over FY14E to FY18E. The company is expected to achieve a strong five-year EPS CAGR of 25% as it expands its product offerings and market penetration.

• Investment Thesis: Sarine's long-term fundamentals are strong, driven by its game-changing products, effective marketing strategies, and the ability to entrench a monopoly position. The company's technologies are expected to revolutionize the diamond industry, leading to a potential annual net profit of USD91M by the end of its growth phase.

• Risks: The breakup of the shareholding structure, particularly the sale of shares by major shareholders, could pose a near-term risk to the share price. However, the company's strong fundamentals and growth potential are expected to mitigate these risks.

Key Information

• Share Price Performance: The share price has risen by 144.0% since 31 Dec 2012, significantly outperforming the FSSTI by 145%.

• Market Capitalization: SGD846.7M.

• Major Shareholders:

  • Sarin Research & Development: 34%
  • Interhightech: 15%
  • FIL Investment Management: 7%

• Free Float: 43.3%.

• Issued Shares: 347 million.

• Dividend Yield: Net dividend yield is 1.9% for FY14E and FY15E.

• Financial Metrics:

  • Revenue: Expected to grow from USD63.8M in FY12A to USD121.4M in FY15E.
  • Core Net Profit: Expected to increase from USD20.8M in FY12A to USD42.6M in FY15E.
  • Core FDEPS (cts): Projected to rise from 6.0 cts in FY12A to 12.1 cts in FY15E.
  • ROAE/ROAA: Both are expected to maintain a high level, with ROAE at 42.1% and ROAA at 34.9% in FY14E.
  • EV/EBITDA: Expected to decrease from 14.0x in FY13 to 10.7x in FY15E.

• Valuation Table:

  • DCF Valuation: The model yields a TP of SGD3.09, with a firm value of SGD849.0M.
  • FCFF: Expected to grow from USD36.6M in FY14E to USD71.8M in FY18E.
  • Terminal Value: Estimated at USD967.4M, with a PV of terminal value of USD612.6M.

Conclusion

Despite near-term risks related to the breakup of the shareholding structure, Sarine's long-term fundamentals remain strong. The company is well-positioned to achieve significant growth through its innovative products and market penetration strategies. The DCF-based valuation model supports a higher target price, reflecting the company's potential for future earnings and the value of its technologies. The investment thesis remains intact, and the recommendation is to reiterate the BUY rating.