Brokers' take: DBS initiates 'fully valued' on Sarine Tech amid industry headwinds

DBS Group Research on Friday (Mar 11) initiated coverage on diamond technology company Sarine Technologies with "fully valued" and a target price of S$0.45.

The research team expects industry headwinds to dull the sparkle for the stock, as a rise in rough prices relative to polished prices would likely weigh on Sarine Tech's revenue.

"The Ukraine crisis may further constrain rough supply and weaken consumer sentiment," said DBS analyst Sachin Mittal in a research report.

DBS's target price of S$0.45 implies a potential downside of 13.5 per cent from Sarine Tech's trading price of S$0.52 as at 11.09 am on Friday. The counter was up 1 per cent or S$0.005 at the time.

Other reasons for DBS's "fully valued" call include the normalisation of Sarine Tech's growth, following an exceptional 2021 performance.

Mittal said: "2021 growth rates benefited from higher rough and polished spreads, a low base effect from 2020, lockdown-induced demand for luxury goods caused by border restrictions, and an urge for emotional gifting in tough times."

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Looking forward, DBS expects rough diamond supply to "stay tight" in 2022. Citing data from Rapaport and De Beers, DBS noted that the inventory of rough diamonds has "depleted significantly in 2021.

"This suggests that there will be fewer rough diamonds available in the market in 2022 if rough production does not increase significantly," Mittal said.

The Russia-Ukraine crisis has also introduced additional fragility to the diamond market, Mittal added. Russian diamond producer Alrosa, which accounts for about 29 per cent of global output, has been placed on the list of sanctioned companies.

On the demand front, DBS expects consumer sentiment to continue weakening amid inflationary pressures, hikes in interest rates and heightened economic and geopolitical risks.

DBS's report was prepared under the Research Talent Development Grant Scheme where the Monetary Authority of Singapore provides co-funding to groom research talent to initiate research coverage primarily of mid-small cap Singapore Exchange-listed companies.