Excerpts from analyst's report

Maybank Kim Eng analyst: Yeak Chee Keong, CFA

Photo: www.mazaldiamond.comProfit Warning: 3Q Operating Loss

»  Warns of USD1.5m operating loss for 3Q15 & subdued sales in 4Q15. Expects normalisation in 1Q16.

»  Improved industry conditions yet to translate into positive effects. We cut FY15-17 EPS by 10-88%. 

» Last low of SGD1.29 now forms our near-term TP, although our DCF fair value is SGD2.54, lowered from SGD2.82 (WACC 11%).

Downgrade to HOLD from BUY pending normalisation.

FY15 a write-off year

Sarine warns of a USD1.5m operating loss in 3Q15. This would be worse than its 1Q15 EBIT of USD0.9m, which we thought was the bottom. This came as a negative surprise as 2Q15 EPS had shown a 208% QoQ recovery. With 1H15 EBIT at USD4.2m, its expected 3Q loss should wipe out a substantial chunk of its accumulated FY15 profit.

1Q16 swing needed to restore confidence
Sarine attributed this and its muted 4Q outlook to:

yeakcheekeong7.14"We cut FY15-17 EPS by 88%/18%/10%. Our DCF fair value accordingly dips from SGD2.82 to SGD2.54, which is attainable if eventual adoption of its technology pans out. But given this surprise weakness, we downgrade the stock to HOLD and would wait for clearer signs of 1Q16 normalisation. The stock’s last low of SGD1.29 forms our near-term TP." -- Yeak Chee Keong, CFA (photo)

1. A rough-polished price mismatch, which led to weak roughdiamond purchasing and subdued manufacturing.

2. Although market conditions improved in late 3Q - rough prices fell 8-10%, the Hong Kong jewellery show was better than expected and US retail sales grew YoY for four consecutive months - these came too late to benefit 3Q15.

3. Manufacturers are sitting out for rough prices to fall further before replenishing their stock.

4. 4Q15 manufacturing is likely to be affected by the Diwali holiday in early November. Normalisation is expected in 1Q16.

Full report here. 

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