Sarine Technologies - UOB Kay Hian 2021-01-27: Diamond Industry Leaders Optimistic On Recovery


Sarine Technologies - Diamond Industry Leaders Optimistic On Recovery

  • The return of end-consumer demand for polished diamonds in 2H20 is driving investment and spending across the entire diamond industry value chain. The recovery could not have come at a more opportune time for Sarine Technologies (SGX:U77), which is seeing increasing acceptance and adoption for its patented systems and technologies.
  • Sarine Technologies has market domination ( > 90%) of inclusion scanning and mapping, rough planning and related manufacturing products and services.

Industry leaders across entire value chain expecting bumper sales.

  • Optimism is buoyant across the whole diamond industry value chain from upstream miners such as De Beers Sa, PJSC ALROSA (Alrosa) and Lucara Diamond Corp (Lucara), to downstream retailers including Signet Jewelers and Chow Tai Fook Jewellery. End-consumer demand for polished diamonds returned in 2H20 and the demand remained strong and stable at year-end.
  • On 22 Jan 21, Alrosa reported that rough diamond sales in 4Q20 grew 29% y-o-y, owing to recovery in key sales markets of the US and China. Alrosa sees a positive outlook in the near-term as midstream cutters and polishers are increasing diamond production to 100% capacity (2Q20: 70%) to meet 1Q21 orders as jewellery businesses and dealers seek to replenish inventories.
  • The resurgent in spending across the diamond industry could cast a shine onto Sarine Technologies (SGX:U77), a US$131m market cap company which serves the midstream portion of the diamond industry worth US$35b (in 2018).

Seeing light after six years.

  • Established in 1988 and listed on the SGX in 2005, market cap for Sarine Technologies over the past six years ranged between S$84m and S$1,124m, excluding the post COVID-19 shock in Mar 20 (S$61m).
  • The 94% drop in Sarine Technologies' market value between Nov 14 and Aug 20 was in tandem with the significant drop in earnings per share of US$0.077 in 2014 to a loss per share of US$0.0039 in 2019. See Sarine Technologies' share price performance. The depressed earnings came as a result of several factors including
    1. excess inventories in the midstream market;
    2. reduced quantities of rough stones entering the pipeline;
    3. lower sales of capital equipment; and
    4. the more recent civil unrest in Hong Kong which impaired luxury retail sales.
  • Today, Sarine Technologies’ Galaxy-family inclusion mapping system has gained significant ground since its introduction in 2010. As of end-3Q20, the total installed base stands over 600 systems worldwide; sales are derived on a price per carat model with 80% gross margin, and recurring revenue drives 50% of Sarine Technologies’ top line.

Revolutionising the diamond industry step-by-step.

  • The diamond industry remains traditional, where practices resemble those dating back to the 1800s. This presents an opportunity for Sarine Technologies, which was initially started by a group of 11 industry professionals with the main objective of making the industry more efficient and transparent. Today, the revolution continues to be ongoing and green shoots have emerged;
    • Sarine Technologies’ extensive range of patented technologies across the midstream have been well-received and is ready to move towards the next phase of further monetization; and
    • seeing greater adoption for emerging technologies Sarine Profile, Sarine Diamond Journey, light performance grading and AI-derived 4Cs e-Grading, which could potentially lift 2022 earnings.

Near-term key catalysts to Sarine Technologies share price include:

Sales and earnings recovery in 4Q20.

  • Taking cue from the sales recovery and optimistic outlook from industry peers and customers including Alrosa, Lucara and Star Diamond, Sarine Technologies’ upcoming 4Q20 could sing a similar tune.
  • Furthermore, Sarine Technologies’ latest corporate slides (see Sarine Technologies' announcement dated 06-Jan-2021), presented during the 23rd Annual Needham Virtual Growth Conference in New York, highlighted the significant recovery of the midstream manufacturing sector in 4Q20, evidenced by scanning of diamonds through Sarine Technologies’ systems on a pay-per-carat basis. Company highlighted that if scans continued into 2021, it would represent a 50% growth over 2019.

Continued acceptance of Sarine’s patented products and technology.

  • The ongoing spread of Sarine Technologies’ products and technologies across the diamond industry, through the company’s solid reputation, would drive overall scalability for the group. Apart from higher sales of capital equipment, Sarine Technologies would stand to benefit from high-margin recurring income on a per-use basis.

Emerging technologies take off.

  • Uptake of products and technologies implemented by Sarine Technologies over the past decade has turned out well, lending good credibility to Sarine Technologies’ management team. Following Phase 1 - the market penetration for Sarine Technologies’ hardware equipment across 2010-2020, Phase 2 would now tap on
    1. cross-selling opportunities;
    2. the utilisation of real-time market data through system scans and
    3. spread of emerging technologies such as Sarine Profile, Sarine Diamond Journey, light performance grading and AI-derived 4Cs e-Grading.

Singapore Research UOB Kay Hian Research | 2021-01-27
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