There May Be More Pain To Come For Sarine Technologies Ltd

Sarine Technologies Ltd (SGX: U77) is one company that has not had a good time over the past year. Its shares peaked at more than S$3.20 in late 2014, but since then, the price has fallen by more than half to less than S$1.60 today.

Tracing the decline

Sarine Technologies is in the business of producing systems and products that help diamond manufacturers turn a rough diamond into a polished stone. Unfortunately, the diamond industry has been in challenging times over the past year.

For instance, the price differentials between rough and polished diamonds have been at unsustainable levels (in the sense that diamond manufacturers can’t make a decent profit) for the most of 2015. This has partly resulted in the purchase volume for rough diamonds slowing significantly – purchase quantities are now close to that seen during the global financial crisis in 2008 and 2009.

With the low purchases of rough diamonds, the diamond polishing industry experienced a drop in output of close to 50% in July and August from normal levels.

These factors are impacting Sarine Technology’s business.

The financial effects

Sarine Technologies warned yesterday evening that it might be heading for its first quarterly loss in the third-quarter of 2015 since the global financial crisis. Although the company’s taking measures to cut down its operating costs and manage credit risks from customers, it is still expecting tough times ahead for at least two more quarters.

A potential turnaround

The company is banking on its new products – such as Sarine Light, Sarine Loupe, and Allegro (the last product is targeted at other gemstone markets beyond diamonds) to help diversify its revenue stream and create additional recurring income. But, as new products take time to gain acceptance and scale in the market, Sarine Technologies is only expecting their benefits to be realized in 2016 and beyond.

Foolish Summary

From Sarine Technologies, we see how things can change drastically within a short period of time. The table below shows how the company had seen its earnings climb consistently over the past few years, only to suffer a major set-back this year:

Year Earnings per share (US cents)
2010 3.35
2011 5.17
2012 6.15
2013 6.96
2014 7.83

Source: S&P Capital IQ

It also shows us that there are always risks that are out of a company’s control. In Sarine Technologies’ case, risks such as the market demand for diamonds and the price differentials between rough vs. polished diamonds are not within the company’s control. Yet, they can bruise Sarine Technologies’ operations badly, as we’ve seen.

When studying companies, it pays to be aware of areas that are not within a company’s control but which can have big impacts to the business.

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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 Stanley Lim doesn’t own shares in any companies mentioned.