Brokers' take: Maybank KE starts coverage on Sarine Tech at 'buy', S$0.70 target price

MAYBANK Kim Eng has started coverage on Sarine Technologies with a "buy" rating and target price of S$0.70, on expectations of the diamond technology firm posting a cyclical earnings uplift in tandem with the global diamond industry's recovery.

In an initiation report last Friday, analyst Eric Ong noted that Maybank KE's intrinsic value of the stock implies 17.9 times and 14.4 times FY2021 and FY2022 estimates, respectively, compared to more than 20 times during the previous upcycle.

A successful dual listing on the Tel Aviv Stock Exchange by Q2 of 2021 and a better-than-expected adoption rate for Sarine's e-Grading business could further catalyse the stock, he added.

Mr Ong is conservatively assuming that the group will be able to capture just 1 per cent of the US$500 million diamond grading market in its estimated FY2022 topline through its e-Grading business. In his view, a successful rollout of e-Grading in 2022 could further expand Sarine's recurring income and profitability, considering how its gross profit margin is similar to Galaxy's higher-priced margins of about 80 per cent.

He is also positive on Sarine's expanding market penetration of its Galaxy inclusion mapping systems, which the group expects to see significant deliveries of this year after some orders were delayed in Q1 of 2021 due to "lingering pandemic-related logistical issues".

"The strong rebound in manufacturing activities which started in Q4 2020, is continuing in 2021. This has driven the utilisation of (Sarine's) inclusion mapping systems to peaks of 95,000 stones daily, a throughput 40 per cent higher than pre-pandemic usage," noted Mr Ong.

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Further, he likes Sarine for its efforts to penetrate what he deems the "rapidly growing" market for lab-grown diamonds. In the report, he highlighted that the group has already generated revenues from this niche segment through its manufacturing-related, grading and retail & branding technologies.

"This growing market acceptance of lab-grown diamonds provides a new opportunity for Sarine. Having verified the applicability and adaptability of its various technologies to lab-grown diamond manufacturing, grading and trade, the group has extended its marketing efforts to penetrate this growing market," he said.

As at the midday break on Tuesday, shares of Sarine were trading at 61 Singapore cents, down 0.5 cent or 0.8 per cent.