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Sarine losing shine as demand softens, DBS downgrades to 'fully valued' with lower TP of 33 cents

Khairani Afifi Noordin
·2-min read

The softness in diamond end markets could trickle down to the midstream, which could dampen Sarine’s revenue.

DBS Group Research analyst Sachin Mittal has downgraded Sarine Technologies U77 to ‘fully valued’ with a lower target price of 33 cents from 47 cents previously on softer diamond demand.

In his Feb 28 report, Mittal notes that the US demand — which accounts for roughly half of the global diamond demand — is likely to lean towards cautiousness on the back of a sluggish macroeconomic outlook. Retailers are now more hesitant in purchasing high levels of inventory, while midstream manufacturers are holding on to higher levels of polished inventory whilst maintaining low production.

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He believes that softness in diamond end markets could trickle down to the midstream, which could dampen Sarine’s revenue. “Nonetheless, the weakness in the west could be partially mitigated by post-Covid recovery in China, which accounted for 15%-20% of end-market demand pre-Covid,” Mittal adds.

DBS views diamond manufacturing in India as a key determinant of Sarine’s revenue as it contributes about 90% of global diamond cutting and polishing activity. The value of cut and polished exports from India fell 4% from US$23.8 billion in FY2021 to US$22.9 billion in FY2022.

Mittal highlights the bright spot in trade revenue, which accounted for 11% of Sarine’s FY2022 revenue from 8% in FY2021. He says that traceability has been cast into the spotlight recently, with the US and EU reportedly aiming to develop a “watertight” traceability system in a bid to prevent the imports of Russian diamonds.

“In that regard, Sarine’s offerings such as the Sarine Diamond Journey could benefit through increased adoption. Separately, a broadened use of Sarine’s grading and traceability offerings as well as the pending Gem Certification and Assurance Lab (GCAL) acquisition could further lift trade revenue,” says Mittal.

Given GCAL’s presence in the US, a successful acquisition is likely to accelerate the acceptance of Sarine’s e-grading by the market, which has been the biggest challenge facing the company’s e-grading service, DBS points out.

“In the longer term, Sarine’s efforts to increase higher margin trade-related revenue could lead to an improvement in its margins,” says Mittal.

On the back of cautiousness in the diamond markets as well as a global slowdown and higher operational expenses which have reverted to pre-Covid norms, DBS has trimmed its FY2023 and FY2024 earnings estimate for Sarine by 37% and 33% respectively.

As at 9.53am, shares in Sarine are trading at an unchanged 39 cents.

 

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