Below our expectations. Net losses of US$4.6m in 4Q08 was much worse than market consensus and our forecasts while turnover also tanked 72.6% to US$2.5m as Sarin saw a dramatic drop in demand for diamonds due to the ongoing financial crisis. Coupled with the US$1.8m write-down from its investment in IDEX Online, net profit eventually fell 80.1% in FY08.

FY09 to experience lower opex. While operating expenses in FY08 were higher as compared to FY07, management has highlighted that most of them are non-recurring and that it aims to reduce opex by 15%. Nevertheless, we believe that the commercial launch of Sarin’s Galatea system scheduled to take place during late-2Q09 would require additional SG&A expenses – we therefore have assumed only a 6% decline in opex for FY09 YoY.

Macro outlook has not turned positive. The fortunes of the diamond industry continue to be tied to the health of the US market which accounts for over 40% of the polished diamonds produced globally. Nevertheless, through our discussions with management, we understand that the market share in India and China are expected to equal the US market by 2010.

Valuation & Recommendation. We have slashed our forecasts for FY09 although we note that bottomline is still expected to more than double YoY due to the absence of exceptionals. While the macro picture may not have improved, we are maintaining our NEUTRAL recommendation on valuation grounds while prospective dividend yield of 12% is also palatable.

Currently trading at 5.5x FY09 P/E and assuming that it trades up to the 12-mth historical average of 6.5x P/E, we arrive at a target price of S$0.135. However, we also caution that Sarin has been a highly illiquid stock for at least the past six months.