Can this Growth Share Continue to Shine Brightly?

Sarine Technologies Ltd (SGX:U77) has been a big winner over the last five plus years. The share price for the company has risen 2,650% from 1 Jan 2009 to the closing price on 17 September 2014 (excluding bonus issue). By comparison, the capital gain returns of the SPDR STI ETF (SGX:ES3), a proxy for the Straits Times Index (SGX:^STI), was around 77% for the same duration. The diamond device maker has also paid out a total of US$0.1534 in dividends over the past five financial years. My fellow Fool Ser Jing wrote more about the company’s dividend track record here.

While the returns from Sarine Technologies has been shining bright — as Foolish investors, we should look under the hood to understand what the business drivers for this move in the share price.

A closer look

The business of Sarine Technologies has been to sell a wide range of technology solutions across the diamond manufacturing supply chain.

Currently, the big driver of revenue is its Galaxy family of products which does the evaluation, scanning and mapping of rough diamonds. The installed base of the Galaxy products has been growing rapidly in the past three years. The number of systems has almost tripled in this short timeframe.

Year Installed Base
2011 50
2012 95
2013 140

 Source: Company’s Annual Analyst Presentation

Additionally, as I have shared in my previous post, the Galaxy product family comes with a new business model, which includes usage fee charges based on utilization of the equipment. The new business approach (Sarine’s old model had been based on one-off sales of equipment) has been a success so far, and the contribution of the new recurrent revenue has been growing. This is shown in the table below.

Year % Recurrent Revenue of Overall Revenue
2010 >10%
2011 12.5%
2012 25%
2013 30%

 Source: Company’s Annual Analyst Presentation

The growth of the installed base for Galaxy has also translated to massive revenue growth for one specific country as shown below.

sarine graph 1

Source: Company Earnings Report

According to the diamond technology supplier, India accounts of 90% of all stones manufactured worldwide. As such, it follows that 76.5% of the company’s revenue in 2013 (the financial year lines up with the calendar year) comes from India. Majority of the revenue growth in the past five years also came from the same country. Revenue in India grew by 245% during this period.

The company does not provide the breakdown of profit by country, however, we are able get some clues from the progress of its cash and debt over this timeframe. During these five financial years, Sarine reported no bank borrowings. Its cash balance has also grown substantially during this time.

sarine graph 2

Source: Company Earnings Report

A quick look ahead

Sarine has recently launched two new products — Sarine Light and Sarine Loupe. The technology behind its Sarine Light product came from its acquisition of Light Performance Technology in December 2010. According to the company’s analyst presentation in 2012, the Sarine Light product aims to set a new standard for Light performance parameters, (such as brillance, fire, scintillation/sparkle, and symmetry) and was initially targeted for US and Far East. Sarine Loupe on the other hand was introduced to select Indian manufacturers and Israeli wholesale traders.

Both products are aimed for the wholesale and retail market which Sarine estimates to have an industry size (note: not addressable market) of at least US$74.5 billion in 2013.

Foolish take away

As lifelong students of Foolish long term investing, it pays to look under the hood to understand whether a rise in the company’s share price is supported by the quality of growth that we are looking for.

Although the share price growth for Sarine Technologies has been nothing short of stupendous, we should take note that the company operates in a cyclical industry, which can turn on a whim. Additionally, the nature of the diamond indsutry may cause Sarine’s revenue to be highly concentrated in different segments of the supply chain – as we have seen from its 76.5% revenue from India.

My fellow Fool Sudhan also pointed out a major risk in the horizon for Sarine Technologies. Related to this, a report from Guardian had the largest diamond mining firm in the world, De Beers warning that diamond production is set to decline by 2020 unless new major sources of diamonds are found. This may make Sarine’s foray into the wholesale and retail market with its Sarine Loupe, and Sarine Light product all the more vital for its long term sustainability.

In all, it is really up to the Foolish investors to decide how he or she sees the long term opportunities ahead for the company.

As of its closing price on 17 September 2014, Sarine Technologies traded at a lofty price-to-earnings ratio of around 30 and has a dividend yield of 1.4%. Learn more about the hottest companies and news. Sign up now for a FREE subscription to The Motley Fool’s weekly investing newsletter, Take Stock SingaporeIt will teach you how you can grow your wealth in the years ahead.

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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 Chin Hui Leong doesn’t own shares in any companies mentioned.