Growing trade revenues to lift margins
- 1Q22 revenue of US$15.6m was in line while net profit at US$3.4m was higher than expected on robust gross margins of 71.8%
- Trade revenues continued to gain traction, reaching 11.6% of overall revenues in 1Q22
- Upgrade to HOLD with higher TP of S$0.50 from $0.45 previously
Investment Thesis:
Burgeoning trade revenues to lift margins: Russian-Ukraine crisis is accelerating demand for diamond traceability. According to our channel checks, the Russian-Ukraine crisis has accelerated interest in traceability solutions by 1-2 years as companies avoid Russian mined diamonds. In 1Q22, trade revenues inched up to 11.6% of overall revenues (vs 8% in FY21, and 11% in 2H21). A growing trade revenues segment is positive for gross margins.
Adopt a cautious stance given the ongoing Russia-Ukraine crisis. While Sarine’s business was not affected in 1Q22, stricter sanctions on Alrosa were enacted in April. At the same time, US demand for Russian diamonds has declined. If the Russia-Ukraine war persists, we could see a weaker diamond industry.
Exceptional growth in 2021 unlikely to be sustained. The remarkable growth rates in 2021 were caused by a myriad of factors such as induced demand due to consumer spending boosted by stimulus checks, favourable polished and rough spreads, a low base effect in 2020.
Valuation:
Upgrade to HOLD with higher TP of S$0.50, from S$0.45 previously. Our TP of 50cts is based on the average of 1) 12.5x (20% discount to historical mean) and 2) peer average of 14x
Where we differ:
We are more cautious on revenue assumptions given the ongoing Russia-Ukraine crisis.
Key Risks to Our View:
Prolonged Russia-Ukraine Crisis, longer than expected bifurcation of rough supply, stagnant trade revenue