Why Has Sarine Technologies Ltd Dropped By 20% In Less Than 2 Weeks?

Two Fridays ago on 12 December 2014, diamond manufacturing equipment maker Sarine Technologies Ltd (SGX: U77) closed at S$2.73. Today, less than two short weeks later, the company’s shares have slid by 20% to S$2.18 (as of 3:35 pm).

As a shareholder of Sarine’s shares of myself, such developments aren’t easy to stomach. But when we are faced with price declines in our holdings, a focus on the business fundamentals of the shares can help provide a stabilizing influence for our emotions. This is important as it can help us minimize emotionally-driven investing actions, which are often riddled with mistakes.

Sarine’s fall from grace

The magnitude of Sarine’s price decline has been severe, so much so that Sarine was issued a “Please Explain” by stock exchange operator Singapore Exchange after its shares had fallen by 5.9% yesterday.

In response to the query, Sarine gave some possible reasons:

“As noted in [the earnings release] for Q3 2014… the diamond industry, in which the Company operates, has been, and is likely to continue to be, during Q4 2014 and early 2015, adversely affected by credit shortage, increase in polished diamond inventories and the divergence in the prices of rough stones and polished diamonds. Based on recent publications made by leading figures and analysts in the diamond industry and based on queries made to the Company following such publications, it appears that such trends have indeed continued.”

So, it seems that Sarine’s sharp fall recently had likely been at least partly due to worsening business conditions – and that can’t possibly help calm investors’ fraying nerves!

A focus on the business and history

But, if we dig deeper, we might realise that none of these challenges are new to Sarine. Let’s take the divergence in prices of rough stones and polished diamonds as an example. Consider the following commentary found in Sarine’s third quarter earnings release for 2014:

“The divergence in prices experienced so far this year is not at all as significant as those experienced in the previous two years (2012 – 2013). However, due to the potentially negative effect of such a divergence on our business, we continue to monitor these trends closely.”

In other words, Sarine has faced worse situations when it comes to price divergences in the past. And yet – as you shall see in the chart below – it has come out tops.

Next, let’s focus on the credit shortage. The following is what Sarine wrote on the topic in its Q3 2014 earnings release:

“The shortage of available credit in India is becoming more significant, as several banks in Belgium and the Far East have either curtailed or reduced significantly (by up to 25%) their extension of credit to the diamond industry. The credit issue has further been exacerbated by the increase in polished diamond inventories held by manufacturers, due to the prolonged grading and certification cycles experienced since the beginning of 2014 (coming down now from their Q2 peaks).

These two issues have created significant headwinds working against the sale of high-ticket capital equipment sales, as has been manifested in the latter part of this past quarter. We expect this scenario may continue to impact our customers’ purchases of capital equipment for the rest of 2014 and possibly continuing into early 2015. We do not currently foresee this issue extending significantly into 2015.”

This again, is nothing new though as Sarine had seen a tightening of credit in the diamond industry back in 2012. What follows next is commentary from Sarine on the topic given in Q4 2012:

“As has been discussed previously, the banks financing the diamond industry, not only in India, but in Belgium too, have become more circumspect in their extension of credit to their customers. Though not as critical an issue as during the summer of 2012, when manufacturing turnover dropped and banks worried about the ability of their customers to service their credit lines, we believe this caution on the part of the banks, and the more limited availability of working capital, has become the norm.”

Growing in the face of adversity

So, business conditions for Sarine can’t exactly be characterised as smooth-sailing even back in 2012 and 2013. But look at the chart below to see how the firm’s important business metrics (revenue, profit, and the number of Galaxy systems installed; the Galaxy systems are Sarine’s flagship products and help to drive the growth in recurring revenue for the firm) has changed since then.

Sarine Technologies' business metrics

Source: S&P Capital IQ and Company’s filings; data for 2014 are as of 30 September 2014

Despite having faced business difficulties in the past, Sarine has still – as I mentioned earlier – come out tops by growing its top- and bottom-lines, and expanding its base of installed Galaxy systems.

In addition, the company has some compelling growth drivers such as the introduction of new products – Sarine Light and Sarine Loupe – that aim to tap into the retail segment of the diamond industry value chain. It’s a part of the diamond industry which Sarine has never had exposure to in the past, so that can be an interesting avenue for growth, especially when considering that the market value of the retail segment of the diamond industry is estimated by the company to be around US$74.5 billion as of 2013.

All these can give investors some confidence that the company has a more than decent chance of coming through the current issues it’s seeing.

A Fool’s take

Sarine’s sudden price decline isn’t easy to stomach. But when it comes to the stock market, that’s just the nature of the game – stocks are volatile over the short-term and investors would have to bear that cross in order to earn great long-term returns. And to make it easier for investors to handle such volatility, a focus on the history of Sarine’s business developments as well as its future prospects, can help a great deal.

To be clear though, none of the above is to say that Sarine’s shares would definitely make for a great investment going forward. Instead, it’s meant to be used as an example of how investors can face short-term share price drops with equanimity.

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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 writer Chong Ser Jing owns shares in Sarine Technologies Ltd.