Sarine Technologies: As previously guided, Sarine Technologies' 1Q15 net profit crashed to US$0.9m (-90% y/y; -78% q/q), as revenue halved to US$12.2m (-50.1% y/y, -34% q/q) as business suffered from weak sentiment in the midstream diamond industry.
From an industry standpoint, high rough diamond prices an lower polished prices (primarily in China) have squeezed manufacturer margins. This coupled with weaker consumer demand across most markets outside the US, as well as limited credit availability for second and third-tier Indian diamond manufacturers, have led to a shift towards smaller stones, resulting in lower processing revenues.
Accordingly, recurring income from Galaxy-related products slipped 20% y/y and 4% q/q and accounted for just over half of overall sales.
For the quarter, Sarine sold only five Galaxy-related products, bringing the total installed base to 195. Gross margin contracted 7ppts to 65.8% on the lower sales and composition of product mix.
Bottom line was shored up by an income tax credit of US$0.1m (1Q14: -US$1.8m), derived from deferred tax assets from subsidiary losses.
Balance sheet remains strong with net cash of US$47.3m.
Going forward, demand for polished diamonds is expected to remain muted on the following factors:
- Ongoing anti-corruption measures in China
- 60% devaluation of the rouble in USD terms
- Lacklustre economy in Japan
- Weakened demand in Dubai and the Middle East, hit by lower oil price
At $1.965, Sarine is currently valued at 27.1x consensus FY15 P/E, in line with US-listed diamond retailers' average of 27.3x.
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