Sarine Technologies Ltd’s Latest Earnings

Sarine Technologies Ltd (SGX: U77) reported its earnings for the quarter and year ended 31 December 2015 yesterday evening.

As a brief background for context later, Sarine Technologies sees itself as the worldwide leader in precision technology products that are used for the planning, processing, evaluation, and measurement of diamonds and gemstones.

You can read more about the company in here and catch up with the results from its second-quarter earnings here.

Financial highlights

The following’s a quick summary of the latest important financial figures from Sarine Technologies:

  1. For the fourth-quarter, Sarine Technologies’ revenue was down 32% year-on-year to US$12.4 million. For 2015, revenue for the diamond systems manufacturer was US$48.4 million, down 44.8% compared to 2014.
  2. Net profit for the fourth-quarter fell by 61.3% year-on-year, ending with just $1.4 million. For the full year, the company’s profit had collapsed by 88% to US$3.2 million. Despite the much lower revenue, Sarine Technologies had maintained its spending in research and development as well as sales and marketing expenses for the full year (the two items had declined by just 0.5% and 0.4% in 2015). The combination of lower revenue and unchanged expenses led to the drop in profit.
  3. Diluted earnings per share (EPS) for Sarine Technologies was S$0.0059 for the fourth-quarter, down from the $0.0156 recorded a year before. For the full year, diluted EPS was S$0.0144, a big decline from the S$0.1089 seen in 2014.
  4. For 2015, cash flow from operations came in at US$6.5 million with capital expenditure clocking in at US$3.5 million. This gave Sarine Technologies positive free cash flow of a little under US$3 million for the full year. In 2014, it generated US$31.1 million in free cash flow (US$34.3 million in cash flow from operations and US$3.1 million in capex).
  5. As of 31 December 2015, Sarine Technologies had US$19.3 million in cash and equivalents and no debt. This was a slight step backward from the $20.3 million in cash and equivalents and no debt that the company reported in 2014. Short-term investments (bank deposits) was US$13.3 million at the end of 2015, down from US$25.1 million at the end of 2014.


Operational highlights

Sarine Technologies had faced a tough operating environment in 2015, with diamond manufacturing activities dropping by 30% to 50%. The challenging situation was primarily due to overly aggressive rough diamond pricing, which worked against stagnant polished diamond prices and higher than normal polished inventory levels.

On the company’s geographical markets, the falls in revenue from India and Africa were particularly acute at 51% and 44%, respectively, for 2015. As I noted before, India is a particularly important market for Sarine Technologies. For the full year, sales from India made up 70% of the company’s total revenue.

For the fourth-quarter of 2015, there were 13 Galaxy systems delivered including five newly-launched Meteor Systems, a small-stone inclusion mapping system. The total installed base of Sarine Technologies’ Galaxy family of systems stood at 215 as of 31 December 2015.

Uzi Levami, the chief executive of Sarine Technologies, had given some comments in the earnings release on the future prospects of the company’s business:

“We are pleased to see business sentiments in the diamond manufacturing midstream continuing to improve following year’s end, backed by a further 7-10% reduction of rough prices in January 2016, bringing total aggregate correction to well over 20% in the past 13 months. This was further supported by continuing increases in polished diamond jewellery prices, which jumped in January by no less than 7% in the U.S.

By some reports, midstream polishing margins are now at levels not seen since early 2014. The latest DeBeers sight, concluded just last week lends further support to the current positive business sentiment. In-plan demand for rough diamonds was reportedly close to US$ 1 billion (also because the next sight is in April) and an estimated US$600 million were in fact sold by DeBeers through its various channels. Other diamond mining companies similarly experienced positive rough selling tenders, and the demand for rough diamonds in the secondary market is high. All these factors further imply the industry’s trending return to normal. Evidently, the industry is over the worst of the downturn.

With the reduction of inventories, working capital credit availability is also less of a problem in the midstream and Indian banks are reportedly softening their attitude towards the industry. Even though manufacturers are wary of Chinese market demand slowing, we are seeing record numbers of stones being scanned by our inclusion mapping systems and have already taken orders in the first two months of 2016 equal to the business realised by the Group in all of Q4 2015.

Barring unforeseen circumstances, we expect midstream manufacturing activities to continue to improve over the course of the year.”

From Levami’s comments, it looks like the reporting quarter saw a 31% sequential rise in revenue, and further improvement in the next quarter are expected.

Foolish summary

At its closing price last Friday of S$1.35, Sarine Technologies traded at around 94 times trailing earnings and has a trailing twelve months dividend yield of 3.1%.

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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.