Christmas Special: Sarine Technologies - Will This Hidden Gem Shine Again?

by: Tam Ging Wien


All examples and stocks quoted here in this article and on the ProButterflyTM site are for learning purposes; it does NOT constitute financial advice or a Buy/Sell recommendation. Contents are reflective of personal views and readers are responsible for their own investments and are advised to perform their own independent due diligence and take into their own financial situation. If in any doubt about the investment action you should take, you should consult a professional certified financial advisor.


Sarine Technologies (Sarine) is an Israel-based company that designs and manufacture tools for gem-stone manufacturers covering mostly the mid-stream aspect of the diamond business. Its key business is in the supply of development and manufacturing of advanced evaluation, planning, cutting, polishing and grading systems for gem-stone especially diamonds.

At the beginning of the year, Sarine traded at $1.79 and today it is trading at about $0.95. This is a severe 47% decline. In May-2017, it traded at a high of $1.94.

Theft of Intellectual Property

In Jun-2017 this year, Sarine announced that it was perusing legal action in India against companies which has infringed on its intellectual property. It made a further announcement that 2 Indian suspects has been arrested in Tel Aviv on suspicion of attempted theft of Sarine’s technology. According to reports, these copyright and patent infringement resulted in loss of revenue for Sarine causing poorer than expected H1-2017 results. Its stock price has suffered following these developments.

Going forward, Sarine is seeking protection under its US patents and copyrights to file actions to block the importation into US any diamonds which were manufactured as a result of the infringement. The US is estimated to be 40% of the global diamond retail market and a successful enforcement would benefit Sarine significantly. Such applications could take anywhere from 6- to 18-months.

World Leader in Diamond Equipment

Sarine has an estimated 70% to 75% of the world market share in diamond cutting/polishing/grading equipment and stone optimization software. The fact that it is facing numerous attempted IP theft and infringement is no doubt in our view a reflection of the intellectual property moat that it possesses.

Strong Balance Sheet and Cash Flow

Source: Sarine Technologies Ltd Annual and Financial Reports

Source: Sarine Technologies Ltd Annual and Financial Reports

Sarine’s revenue fell 14.7% from US$53.6mil to US$45.7mil for nine-months ending 30-Sep-2017. Significant increase in R&D, sales and marketing and other administrative expenses pushed its profits down 60.3% from US$13.0mil to US$5.15mil. The profit plunge in percentage terms mirrors the stock price fall.

Despite the significant fall in its net profits, Sarine has still managed to maintain both healthy operating and free cash flows. Its operating cash flow and free cash flow for nine months FY2017 stood at US$9.0mil. Sarine pays out about US$12.1mil in dividends last year which works out to US$0.035 per share. We think that in light of this case, Sarine may choose to reduce the dividend temporarily and we are making a conservative guess at US$0.025 in FY2017. At the current trading price of S$0.95, this works out to a yield of about 3.6%.

From a balance sheet perspective, Sarine is cash rich with US$27.8mil in cash and zero debts. Its total liabilities is a mere US$10.63mil. Its cash alone could easily pay off all its liabilities more than 2 times over.

In the short term, the stock will likely continue to be depresses owing to the current downcycle in the diamond industry and the uncertainly surrounding Sarine’s business performance due to this IP infringement case. We however personally think that Sarine’s management will likely be able to steer through this current crisis as they have a strong case to support their IP infringement claims. Its zero debts and high cash holdings will allow it to weather any storm.

Sarine has also announced a number of share buy-backs in September, October and November 2017. These share buy-backs will likely help defend the current share price level.

Perhaps at these levels, Sarine may be worth a closer look for investors with a longer term view.

We at ProButterflyTM are keeping a close watch on this counter.

 

 

 


Disclosure Statement

The views and opinions expressed herein are those of Tam Ging Wien (“the author”) and do not necessarily reflect the official policy, position or view of the author’s employer, organization, committee, or other group(s) or individual(s).

The author at time of writing owns shares in Sarine Technologies Ltd.


 

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