Investor Brief: Why Sarine Tech (U77) still remains a buy at this valuation

Polished diamond prices are up 5.1% from their lowest point in March, putting them at their highest level in nearly a year and a half, according to a gauge compiled by the International Diamond Exchange.

Target Price: $1.3 (rationale: with gross profits expected to recover to 2017/2018, we believe valuation will ultimately re-approach 2017/2018 levels) 

Sarine Tech Weekly Charts

What does Sarine Tech do?

(Source: Sarine Tech investor presentation slides)

1.  Increased online sales: Bain Consulting report (see below for links)

There could be further upside to diamond sales as the millennials (as well as the Gen Ys and Baby Boomers) are engaged more over time - COVID19 lock-downs may be protracted and people more likely flock to online e-commerce sites to purchase diamonds.

2. Macroeconomic Factors

Key economic drivers which can boost diamond industry recovery include year-end bonuses, festive season, inconvenience and unavailability of travel (thus people spending their money on luxuries like diamonds for loved ones), upcoming Valentine's Day without the possibility of travel and expected macro-economic recovery in leading economies.

3. Easing of Selling Pressure on Daily Charts + Short Volume remains low

What we think is not important. What the market thinks and sentiment is more important. To that effect, SGX short-sell volume for the U77 counter has remained below 10% and on the daily charts, selling pressure has eased tremendously.  Short-sell volume is empirically co-related to stronger stock prices and if SS volume can remain below 20%, this is a positive indicator.

Feb 10, short volume: 10%

Feb 9, short volume 5%

Feb 8, short volume 7%

4. Analyst Coverage on U77: UOB KH

Though un-rated without TP, further coverage possible. See the report here.

5. Technical Indicators suggest that the uptrend is intact

On 8 Feb, sell signal was issued on the daily charts due to moderate volume sell-down. Despite this, from 9 Feb to 11 Feb, Sarine's price has remained supported above 61 cents. Volume has decreased considerably indicating that the stock has entered low-volume consolidation phase and profit-taking as well as short-sell interest is over. Buyers are re-entering this gem, and indeed, in the past few trading days, we notice that prices did not even test the key psychological support of 60 cents. On the charts, higher lows are being formed and a  bull-flag pattern can be seen. Likely looking at a few days of consolidation before attempting to test 70 cents again.

On the daily and 4 hourly charts, prices have maintained above the Tenkan line of the Ichimoku cloud system in recent days, indicating a strong uptrend.

What are the weaknesses on the charts? Prices failed to successfully re-test previous high of 70 cents and only reached 67.5 cents. 10 Feb daily candle is also ugly. We need to see a more buyers-in-control situation within this consolidation range to propose a more confident technical buy.

6. Earnings report can serve as upcoming catalyst

7. Cash position remains strong, which can inspire investor confidence

2019, cash and cash equivalents increased from $16 mil to $18 mil. 

8. Sarine Tech is well-positioned in all stages of the diamond trade

This indicates well-diversification of the value chain, so that it is able to adjust accordingly to any potential demand spikes in different parts of the  diamond industry value chain.

9. Consistent Dividend Payouts and expectation of Upcoming Dividends

This can inspire investor confidence and attract long-term retail and institutional investors who are willing to ride up the recovery of this multi-bagger stock.

10. Company has strong fundamentals

Other key financial metrics:

PATMI consistently positive, with 2016 showing Sarine recording $18 mil, swinging into negative in 2019 due to a slump in diamond prices, and then showing some signs of recovery in 2020 into positive region.

EPS has decreased from 5.1 in 2016 to -0.4 in 2019 before showing gradual recovery to 0.3 in 1H2020 despite COVID situation. Expected that 2H2020 will be spectacular given pent-up demand for jewellery following macroeconomic recovery.

While 1H2020 P/E ratio is at over 60, this is indicative of investor confidence for a swing into huge profitability for this company with a long history of innovation and resilience, dating back to 1995. This means it has survived the 1998 and 2008 financial crises - well-intact and with cushy cash reserves.

Further Readings:

Hong Kong Polished Trading Recovers

Signet, a prominent diamond retailer listed on the NYSE (NYSE:SIG), has recorded Bullish action, pushing up from $40 to $44 in the last 3 days - Buying up volume on 10 Feb more significant than sell-down volume on 9 Feb

Russian diamond supplier Airosa rough sales increased, CEO says that demand is increasing in US and China

Bain and AWDC released its report, indicating resilient recovery in 2021

Diamond prices regain their sparkle: WSJ

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