Sarin Technologies (U77.SI)
Recommend to: Hold
Intrinsic value: S$1.82, Previous Closing Price: S$1.90
Main Activities
Sarin Technologies Ltd develops, manufactures, markets and
sells precision technology products for the processing of diamonds and gemstones.
It provides smart solutions for every stage of the rough diamond manufacturing
process, from determining optimal polished gem based on true dollar value,
through laser cutting and shaping to inline quality control of faceting. It has
operations across India (contributing
76% revenue), Africa(8%), Europe(3%), North America(2%), Israel (5%).
Main revenue contributors are software products that assist
in evaluating rough diamonds and also production and planning of unpolished
diamonds into polished ones, while the company is also in progress of rolling
out Sarin Light and Sarin Loupe which will help to expand the business segment
into retail sector by addressing the last of the four C’s - Clarity. Sarin
Light is a system that enables the automatic, consistent and quantified
measurement of a polished appearance while Sarin Loupe is an imaging system
which creates high quality visual imagery to both buyer and seller so that a
polished diamond can be inspected virtually from multiple angles without having
the polished gem physically in hand.
Key development
High barrier of entry for Planning Software:Galaxy
Sarin has rolled out and refined the planning software for
scanning stones down from 2.5 carats and up to 180 carats in weight, which
means that the software is able to cover the entire ranges of stone sizes that
meet different customer requirement.
Sarin’s Galaxy family system is currently contributing over
25% of revenue of the group in 2012 and recurring revenue grew by approximately
50%. As there is a high barrier of entry and the manufacturer is reluctant to
switch to another system once the process has been in place, we view that this
is favourable for Sarin to maintain high profit margin going forward.
Penetration into retail segment
Sarine Light is currently being rolled out to enhance the
consumer’s buying experience. We view that this is a positive value enhancement
to the company to be involved in selling the technology products to retail
sector. An initial commercial agreement with significant retail chain of
diamond jewellery in Asia was concluded in early 2013 and CIMA, Japan ’s leading bridal diamond jewellery chain,
has rolled out Sarine Light Performance grading reports on polished diamonds in
all its stores throughout Japan
in early April 2013. On the other hand, Sarine Loupe is scheduled to be rolled
out commercially in late 2013.
Highlight from
Financial Statement 2012
Revenue increased by 10.3% to a record US$63.8m despite a
significant decline in industry activity during the months of June through
September. Increased in revenue mainly contributed by high rate of penetration
and usage of Galaxy-related product(25% of revenue) .
Gross margin improved to 68%(up 2% YtoY) due to increased
sales volume and recurring revenue contribution of Galaxy business model.
Operating profit also increased to record US$24.5m representing high profit
margin of 38.4%. Net profit is a record of US$20.8m(up 19.5% YtoY) while the
net profit margin increased to 32.6% from 30.0%.
Cash level is healthy as seen from operating cash flow
greater than net income which stands at US$23.2 mil. ROE and ROA stands out at
36.9% & 30.6% respectively. Dividend payout ratio also increased to 74.2%
representing a dividend yield of 5%
Risk
1)
Drop of price of the rough diamond in 2012 but
remain stable in 2013, though this will contribute positive sentiment in
diamond industry, but is a key risk factor to watch out for if there is any
slowdown in economy.
2)
High geographical exposure to India which is
currently battered down by high inflation and current account deficit which
will hinder the growth of the business if the manufacturer decided to scale
down the business.
3)
Location of the company is in Israel , which remains as another geographical
risk factor if there is any political instability in Middle
East countries.
Valuation
Using FCFF valuation of maintaining current revenue growth
rate of 11.2 % (5 years average) and a pre-tax operating margin of 72.61%(5
years average) deriving an intrinsic value of S$1.82. Remain hold.