1 Major Risk at Sarine Technologies Ltd That Investors Should Know

Sarine Technologies Ltd (SGX: U77) is a leader in precision technology products for the planning, processing, evaluation and measurement of diamonds and gems, supplying to several companies in the diamond industry.

A Brief Look at the Latest Results

During the first half of 2014, Sarine’s revenue went up 16% year-on-year to US$49.1 million due to increased sales from both its Galaxy family of products and its offerings for rough diamond planning and processing. Consequently, net profit increased 8% to US$17.6 million.

The firm also anticipates growth in the form of new products such as Galaxy Ultra, Sarine Light, and Sarine Loupe as announced during its earnings release.

As Foolish investors, we also need to be aware of risks that are coupled with the companies we invest in. For Sarine, the risk may come in the form of rough diamond prices.

Welcome to De Beers

The global diamond industry can be segmented into five major segments; mines, wholesale traders, manufacturers, gemological laboratories, and retailers.

Diamonds are traded by wholesale traders in two forms – rough and polished. De Beers is the most famous rough diamond wholesaler and it controls around 60% of all the rough diamonds in the world, tightly influencing their supply to the market. Therefore, De Beers is the primary source of rough stones in the industry.

If De Beers increases the price of rough diamonds significantly, the difference between the prices of finished diamonds and rough diamonds will narrow. This will in turn reduce the incentive for manufacturers to produce finished products. Subsequently, Sarine’s suite of equipment will be less in demand.

This was also revealed in Sarine’s website. Under the “Risk Factors” of its business review, it shows:

“Prices of rough diamonds continue to be of concern, though, for the time being, the drop in rough prices and stabilisation of polished prices in the last four months of 2012 has had an overall positive effect on the diamond industry. If rough prices do not run away, as in 2012, and polished prices remain stable or gain traction, this should contribute to a continued positive sentiment in the industry, but one needs to keep close track of possible developments.”

A report released last year by shows that prices of rough diamonds may balloon in 2018 due to “a steady diamond demand in the United States, paired with an ever growing appetite for these precious stones in China and India”.

Foolish Takeaway

Sarine’s shares have produced returns of more than 2,800% since its lows in 2009 and is currently trading at around 30 times its historical earnings. However, if rough diamond prices indeed run away, Sarine’s business may be affected badly.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Sudhan P doesn’t own shares in any companies mentioned.