Sequentially  weaker  3Q13  as  anticipated. 3Q13 net profit of USD3.1m (-63% QoQ) was a function of weaker revenue of USD17.3m (-22%  QoQ)  and  a  one-time  tax  charge  of  USD2.6m.  The  3Q13 performance  was  affected  by  a  slowdown  in  the  Indian  diamond manufacturing  sector,  which  was  hit  by: (1) weakened INR, (2) tightened credit conditions,  and (3) margin squeeze for manufacturers on high rough diamond prices.

Galaxy deliveries slower but continues to increase. Only 5 Galaxy systems  were  delivered  in  3Q13  (2Q13: 17, 3Q12: 5), bringing total installed base to 127. Recurring revenue accounted  for ~30% of 9M13 revenue, mitigating volatility in capital equipment sales.

New  revenue  drivers  progressing.  There was maiden contribution from Sarine Light (TM) this quarter which was insignificant, but importantly, more  retail  chains  in  Japan  have  begun  adopting  the  system. Sarin intends to launch this  product in Hong Kong and Taiwan by 1Q14. The Sarine Loupe (TM) will also be introduced to select manufacturers in India after the Divali holiday before its commercial launch in 2014.

Hiccups temporal; expect a strong earnings recovery  year in 2014. 4Q13  may  continue  to  be  weighed  down  by operational headwinds confronting the Indian manufacturing sector but we expect a sequential improvement as the operating environment has improved. This should also pave the  way for a strong earnings  growth year in 2014. We cut our FY13-15 forecasts marginally by up to 1.2%.

TP  raised  to  SGD2.16,  reiterate  Buy. Sarin's stock price has appreciated  by  17%  since  2Q13  results  despite weaker guidance for 3Q13.  We  still  see  a  strong  long-term  investment  case  for  Sarin. We see  potential  earnings  kicker  from  its  new  product  launches,  implying room  for  positive  earnings  surprises.  We raise our TP to SGD 2.16, based on 15x FY14 PER (previously 13x). We believe that our valuation is fair considering its 31% EPS  CAGR and high ROEs of 40-50% over FY13-15. In comparison, diamond miners and retailers trade at average PERs of 14x and 26x respectively. Reiterate Buy.

Source: Maybank Kim Eng Research - 5 Nov 2013