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Why Has Sarine Technologies Ltd Fallen By 24% Today?

As of the time of writing today (12:00 pm), shares of Sarine Technologies Ltd (SGX: U77) are down by 24% to S$1.95 from their close at S$2.56 last Friday.

Short-term price movements can often happen for no rhyme or reason. But this particular fall experienced by Sarine Technologies can quite clearly be traced to an announcement it made on Sunday night.

Drastic short-term pains

The company, which provides technologies and equipment for diamond manufacturers to help improve their diamond-manufacturing operations, revealed in a profit guidance that its revenue for the first quarter of 2015 “were impaired by around 50% as compared to the same quarter in 2014.”

Meanwhile, as a result of increased spending on research and development and marketing-related activities for new product launches, Sarine Technologies also wrote that it “expects to more or less break even (EBITDA and cash flow should be positive).” Put another way, Sarine Technologies expects to clock near-zero profit for the quarter.

For some perspective, Sarine Technologies’ top- and bottom-lines were US$24.4 million and US$9.1 million respectively in the first quarter of 2014; for the whole of 2014, the diamond manufacturing equipment provider clocked in revenue and profit of US$87.8 million and US$27.3 million.

In the profit guidance, Sarine Technologies had painted a distressed picture of the diamond manufacturing industry. Some highlights are given below:

  • “…during the first quarter of 2015… [diamond] manufacturers had reduced output by some 20 – 30% accordingly”
  • “…rough diamond prices had increased overall for most of 2014, out of sync with polished diamond prices market trends…”
  • “.. the end-of-month March sight [held by DeBeers] saw an almost unprecedented refusal in excess of 30%, showing distinct sightholder realization that at current rough (and polished) diamond price levels there is an inherent inability to create sustainable profitability. Purchases were limited to minimal quantities necessary.”

Possible light at the end of the tunnel

The last example in particular highlighted the crux of the issue that’s impacting Sarine Technologies.

As the company provides solutions for diamond manufacturers, demand for its products and services would in turn depend upon the level of profitability that the diamond manufacturers can achieve in their own operations.

That in turn depends on the differential between rough and polished diamond prices; the cheaper rough diamonds are in relation to polished diamonds, the higher the level of profitability for diamond manufacturers.

Given that “there is an inherent inability to create sustainable profitability” with the current market dynamics in the diamond industry, it thus follows that Sarine Technologies’ business would be in for some rough times.

But, that is also where a cause for optimism can be found. It’s logical to think that economics would prevail and correct the current dynamics in the diamond manufacturing sector such that the manufacturers can eventually return to sustainable profitability. When that happens, Sarine Technologies, with its dominating share of its market niche, would likely be able to see demand for its business resume.

History repeats

Last December, Sarine Technologies saw its share price fall sharply by more than 20% to a low of $2.16 in the space of two weeks and I had penned an article about it. Back then, the company had already warned about some of the difficulties its business and the diamond industry was facing.

But, I pointed out in my article that Sarine Technologies has managed to grow its business (in terms of revenue, profits, and the number of Galaxy systems installed; the Galaxy systems are the company’s current flagship products) even when it was facing similar challenges in earlier years. These can be seen in the graph below, which was given in my earlier article too:

Sarine Technologies' business metrics

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

Sarine Technologies’ price had recovered to a peak of S$2.91 shortly after that sharp mid-December 20%-plus decline. Its shares then started slipping again before today’s shellacking.

This time around, Sarine Technologies has already warned that its business has shrank by a significant amount. Will its price ever recover and attain even greater heights or is there more pain to come? That would really depend on whether the pricing issue between rough and polished diamonds can correct in a sustainable manner in the future.

In the meantime, Sarine Technologies, with its strong balance sheet (as of the end of 2014, it had US$45.5 million in cash on hand and no debt), likely has the resources to wait for its industry headwinds to be over. The company, with its innovative nature, is also not just letting itself be carried solely by the prevailing winds – it’s entering other gemstone markets (through its Allegro product) and is still coming out with new products and services that can help improve its customers’ business.

Time will tell if this is just short-term pain for the company or the start of an extended and troubling downward spiral.

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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.