The Curious Case of Sarine Technologies Ltd (SGX: U77)

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I have previously done a few posts about Sarine Technologies.

  1. The 2 Financial Pillars of Sarine Technologies (read here)
  2. Sarine Technology (Gemological) Laboratory: Will this Tech Company be the Pick-axe to the Diamond Gold Rush? (read here)
  3. Sarine Technologies: A turn for the better? (read here)
  4. My thoughts on Sarine Technologies Ltd (SGX: U77) (read here)

In some of my previous posts I mentioned about the financial performance of the company.

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Annual Financial Performance

Below is a snap shot of the annual performance of the company.

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The recent years’ performance has been erratic. FY 2017 was not a good year. However, it is worth noting that the revenue and the net profit of FY 2017 is higher than the lows of FY 2015.

Expenditure wise, Cost of Sale and Sales & Marketing Expenses have not ballooned significantly.

Below is a snap shot of the recurring revenue of the company.

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Year on year there appears to be an improvement, looking at the recurring revenue performance of FY 2017. Despite the drop in total revenue in FY 2017 in comparison to FY 2016, the recurring revenue, on the other hand, continues its upwards march in FY 2017.

In addition, the proportion of recurring revenue to total revenue has been steadily increasing, in line with the increase in the installed base of Galaxy System.

On a more immediate and micro view, the recent Q1 Net Profit performance released in May 2018 has been the best ever since FY 2015. However, it is worth noting that the Q3 2017 and Q4 2017 performances have been a great disappointment.

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Reading through the past reports from Sarine Technologies, analysts’ reports, etc, over the years, we are aware that there are issues that impacted the financial performance of the company.

  • Overly aggressive rough diamond pricing and stagnant polished diamond prices;
  • Existing polished inventory resulting in significantly reduced quantities of new rough diamonds entering the midstream;
  • Deterioration of the diamond manufacturing industry;
  • Illicit operations of parties infringing on Sarine’s intellectual properties.

So it is like a fresh breath of relief when one reads the recent May 2018 Q1 Financial Statements. The significant growth in revenue on a sequential quarterly basis, driven by higher equipment sales and increased recurring income, reflects renewed robust activities in India’s midstream diamond manufacturing sector.

  • Equipment sales and recurring revenues rose amid renewed robust activity in the midstream diamond manufacturing sector;
  • Installed base of Galaxy® family systems grew to 357 units with 12 deliveries to customers in Q1 2018; overall recurring income represented about 45% of Group revenue;
  • Sarine’s ground-breaking AI-based 4Cs diamond grading reports were met with enthusiastic market reception;
  • To support planned adoption by additional higher-volume retail customers, an additional diamond grading lab to open in India in May 2018;
  • Balance sheet remains strong as at 31 March 2018 with short-term investments, cash and cash equivalents totaling US$35.5M and no debt.

Even the issues Intellectual Property (IP) Infringement (eg. Diyora & Bhanderi Corporation and a number of their related entities using an illegally modified version of an older release of Sarine’s proprietary Advisor® program (version 5.x)) appear to be slowly resolved.

One is through judicial recourse, while the other more long-term effort is through the adoption of Sarine’s newest Advisor® 7.0 (which is protected by proprietary home-grown cloud-based cyber protection). To date, over 12,000 installations of its 20,000 over installed systems have migrated to the latest version.

And the recent quarterly financial performance does indeed seem to support the above mentioned good news.

  • Sarine Technologies Q1 profit up 27% to US$3.1m (read here)
  • Sarine reports 27% rise in 1Q18 earnings to US$3.1 mil (read here)
  • Sarine kept at ‘add’ by CGS-CIMB on IP protection progress, continued growth (read here)
  • India Upturn Boosts Sarine’s Results (read here)
  • Sarine Secures First Retailer for 4Cs Grading (read here)

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Share Price unaffected by Good Q1 Results

So it is odd that share prices continue to plummet downwards, even after the release of the good Q1 results (nevertheless it is just one quarter).

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From a high of SGD 2.88 in early 2015 (given the announcement of the deterioration in earnings starting from the 1st half of 2015), the share price has dropped to SGD 0.98 on 25 May 2018.

That is even lower than the share prices in 2015 and 2016 when the earnings were worse (Note: FY 2017 Net profit was higher than FY 2015 Net profit).

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In the past, it was easier to understand why Sarine Technologies stock prices dropped.

  • Why Did Sarine Technologies Ltd’s Share Price Plunge 17% Last Week? (read here)

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Personally, I am not surprised that the financial results of Sarine Technologies are getting better. If you have read about the progress of Sarine Technologies, you probably wouldn’t be either.

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I do believe that given time, Sarine Technologies will sort out the issues. Moreover, fundamentally, the company is still strong (cash rich), and have improving recurring profits. Many of the problems are due to external market conditions.

They have been actively seeking out opportunities from the down-stream and up-stream sector of the diamond industry while pushing out new and better products and securing more business tie-ups with other related companies.

The business itself is highly scalable.

Geopolitical Risks

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A member in Investing Note highlighted that a possible reason could be the recent conflicts coming out from Israel and the Middle East region. I must say, the Geopolitical risk is the one factor which I did not consider when evaluating Sarine Technologies.

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However, this itself is highly debatable. Do the conflicts have a direct impact on the stock prices of Sarine Technologies?

  • Biggest Flare-up on Israel-Gaza Border Since 2014 War – a Timeline (read here)
  • Palestine: What has been happening since WWI (read here)
  • HEZBOLLAH’S NASRALLAH: IF THERE WILL BE A WAR WITH ISRAEL – WE WILL WIN (read here)
  • FORMER DEFENSE MINISTERS: ISRAEL MUST PREPARE FOR ‘WAR BETWEEN WARS’ (read here)
  • Israel seems to be preparing for war with Iran, U.S. officials say (read here)
  • Israel v Iran: Are they heading for a war? (read here)

Below, I did a simple chronological timeline of the recent events against the share price of Sarine Technologies. There have been more news in the month of May 2018.

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Nevertheless, some may view the current share price as a good entry price (regardless of the geopolitical risks). For me personally, I don’t intend to sell the Sarine Stocks that I currently have, after all, my primary focus will still be on its financial performance and not its share price. The price is there to ‘serve’ the investor.

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“[Benjamin] Graham would tell you that the market is there to serve you, not to inform you. And basically, he would tell you that sometimes the market will be very, very wrong. And if you look at stock prices as buying pieces of businesses, you will be able to recognize when the market is very wrong” Warren Buffett

A quick check on Spiking, revealed that Sarine Technologies have been buying up their own shares (without a single sell) from Nov 2016 till 27 May 2018. (read here) No doubt they are still sitting on big unrealised losses (from their early buys).

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Shall end this post with this small emotional tune.

About apenquotes

Born in 1976. Married with 2 kids (a boy and a girl). A typical Singaporean living in a 4 room HDB flat. Check out my Facebook Page: https://www.facebook.com/apenquotes.tte.9?ref=bookmarks
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5 Responses to The Curious Case of Sarine Technologies Ltd (SGX: U77)

  1. Pingback: The Curious Case of Sarine Technologies Ltd (SGX: U77) | TheFinance.sg

  2. Leo says:

    Hi, do you plan to load more of Sarine shares since there is a slight dip in the share price? 🙂

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    • apenquotes says:

      I did buy a few lots recently after Sarine stock price went below $1. Well, will see how it goes moving forward. Will probably space out the purchases if prices continue downwards. Will be over a period of time – not a big lump sum now.
      BTW I have been invested in Sarine since April 2015. So it is not some short-term trading plays for me.

      Ultimately I like to have a bigger portion of my net worth in my war chest to take advantage of overall market dips. When prices get more irrational. No hurry. But sometimes the waiting do drive me nuts.

      Like

  3. Costas Co says:

    HI, did you consider that the stock may be overvalued? at a P/E > 40? This is a company exhibiting erratic / cyclical revenue / profit development in the last five years. So the price of $2.88 in 2015 might have been the aberration, not the price of $1.00 today

    Like

    • apenquotes says:

      Before 2015, their earnings growth has been impressive – maybe too impressive. Are we all then (prior to 2015), lured by the anchoring bias (expecting earnings to keep accelerating)? If so, are we now, lured by anchoring bias again (expecting earnings to forever deteriorate or stay erratic)? In fact, Sarine’s P/E for Q1 2018 was 29.51 (@ the end of May 2018) – Check out the figure in Morningstar.

      By the way, I am not encouraging people to purchase this stock. In all my posts, I am not doing that for any stocks. When the market tanks, I am sure the stock price of Sarine will tank as well… Then the P/E may drop. Sure it would be a better time to buy – if the company is growing, and will continue growing moving forward – it is the E in the P/E I am focusing on.

      At the end of the day, it is your own belief that is the most important. One should do his own due diligence, and examine his own investing time horizon (is it a short term or long term play) and resources.

      I think P/E is important, but it shouldn’t be your only consideration. Then the question is what is your determination of the forward P/E?
      Stock investing is ultimately forward-looking.

      Studying statistics play only one part. The Narrative plays the other. Does the company overcome the obstacles? Do they have sufficient resources and cash?

      In many ways, the management of Sarine was able to find ways to find ways around the curve balls thrown at them.

      1) Over-aggressive rough diamond pricing… they branched into the downstream sector (which is actually a bigger pie of the diamond industry).
      2) IP infringement … they sought judicial recourse and improved versions of the Advisor (Version 7.0). Also, they branched into sourcing recurring revenue in the downstream sector.
      3) Synthetic diamonds…. their new certification centres help retailers verify the synthetic from the original.
      4) In fact, back in the 1980s, Sarine’s business did not really focus on diamonds but rather in emeralds… so from then till now, they have advanced by leaps.

      Nordic, as mentioned by one of my readers is also strong, despite operating in the difficult oil and gas sextor. They have been constantly evolving to have more recurring revenue.

      Like

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