Berenberg thinks diamonds are losing their sparkle among the younger generation, with millennials instead preferring cheaper synthetic diamonds.
The revelation came as the venerable German investment bank kicked off its coverage of four companies in the sector with two ‘sell’ recommendations, one ‘hold’ and one ‘buy’.
Synthetic diamonds increasingly popular
Analysts noted that the supply glut is gradually reducing although they still expect supply to well outstrip demand until 2022.
Perhaps the biggest worry for the diamond miners is that millennials seemingly aren’t bothered about forking out hundreds of pounds for real diamonds when they could get synthetic ones for a fraction of the price.
“While there is still a market for natural diamonds, particularly in growth markets such as India and China, millennial women are open to synthetic diamonds, with price a key consideration,” read the note to clients.
“We think that synthetic diamond demand in lower price point items will continue to grow and cannibalise demand for natural diamonds (we calculate US$3.7bn by 2030E); this is likely to impact smaller diamond demand and prices, we think, and this is not helped by a flood of new smalls inventory onto the market.”
Lucara and Firestone get ‘sell’ ratings
Reflecting the “relatively cautious” stance on the sector, Berenberg has gone against consensus to kick off its coverage of Canada-listed Lucara Diamond Corp with a ‘sell’ recommendation.
The analysts reckon the market has been “blinkered” by the recovery of two very large stones which were sold in 2016 and 2017. Take these out of the equation, they argue, and consensus revenues look too high.
Berenberg’s other ‘sell’ rating is reserved Firestone Diamonds PLC (LON:FDI), which it notes produces a lot of small diamonds, “relative losers versus larger stones”. Its target of 3p is some way short of yesterday’s 5.1p closing price.
More upbeat on Petra and Gem Diamonds
The bank is slightly more upbeat in its outlook for Petra Diamonds Limited (LON:PDL), which it has a ‘hold’ with a price target of 40p.
“We do not dispute that Petra offers relatively attractive valuation here and an improving story – we are even believers of the long-awaited FCF inflection,” said the analysts.
“But for now, we think that the market is not yet convinced by operational progress, and would prefer to wait for management to deliver a couple of solid quarters and show the progression of reducing net debt.”
There is room for one ‘buy’ recommendation though, and that is reserved for Gem Diamonds PLC (LON:GEMD), which analysts reckon could go as high as 140p.
They said they liked the stock because of its “self-help story, large stone exposure and attractive valuation”.