Sarine Technologies burnishes returns with turnaround and dual-listing move

The first of its kind in the diamond industry, Sarine was established in 1988 by a group of gemologists that joined forces with technological innovators to create the world’s first diamond technology company. Sarine’s laboratories are also the first diamond laboratories in the world to use diamond-grading technologies based on AI.

Until today, a large part of the diamond industry remains traditional, where practices such as grading and evaluating diamonds resemble those dating back to the 1800s. Combining gemology and technology, Sarine has revolutionised the way diamonds are evaluated, manufactured, graded and sold for greater transparency and efficiency in the industry.

Sarine, apart from being the first diamond technology company in Singapore, is also the first Israeli company listed on the Singapore Exchange (SGX). According to CEO David Block, the Singapore listing, which took place in 2005, made the most sense.

Back then, Sarine’s focus was on the midstream manufacturing segment in the diamond industry, mainly in India and China. “Singapore was geographically a good place as it was in the middle of the two countries. We were courted aggressively by SGX to be the first Israeli company to list in Singapore,” recalls Block in an interview with The Edge Singapore.

Photo: Sarine Technologies

Now, Sarine is about to complete its second listing on the Tel Aviv Stock Exchange (TASE). This comes as SGX and TASE have recently authorised the dual listing of companies whose primary listing is on either one of the venues. And with Sarine’s business headquartered in Israel, this dual listing is a no-brainer, for there is “little overhead and little effort in terms of paperwork for our second listing on TASE. We are listing without raising any capital”, says Block.

However, he adds that the main objective of the dual listing is to increase the company’s investor base as it would be more convenient for those in the US time zone to trade. The time difference between the US and Tel Aviv is about seven hours, while the US and Singapore have about 12 hours’ difference.

With its second listing underway, how bright can Sarine shine to attract more investors?

A sparkling gem

Since inception, Sarine’s focus has been on diamond manufacturing. Via its Galaxy line of inclusion scanning products that detect and map internal features in rough diamonds, it helps other manufacturers “extract more value out of the diamond”, through the ability to “consider the inclusions and impurities inside each diamond during the planning process”, according to Block.

However, in the past few years, Sarine has widened its focus to include all three segments of the supply chain — upstream mining, midstream manufacturing and downstream retail — which according to Block, are markets with values of US$15 billion ($19.9 billion), US$20 billion and US$80 billion, respectively.

Block explains that Sarine started its work with diamond producers some two to three years ago, helping this segment add value by supporting digital tenders and traceability.

“Before the introduction of digital tenders, buyers had to either get allocations — what they call sightholders — or acquire rough diamonds through a tender or auction basis, where people would have to physically be present during the auctions,” says Block.

By digitising the information about rough diamonds with Sarine’s Galaxy technology, the buyer is able to remotely find out what is available for sale and properly evaluate the cost of the diamonds. “We saw more of this during lockdowns, where buyers didn’t even have to fly over to see the diamonds and take the decision to buy the diamonds digitally,” says Block, adding that the largest diamond mining company, Alrosa, has increased its digital tenders due to travel bans and is engaging Sarine to create the digital information.

With companies and consumers these days becoming more concerned about sustainability and ethical businesses, traceability has become more important in the diamond trade, which has long acquired a negative reputation for exploiting workers.

“The Sarine Diamond Journey is an endto-end pipeline, not only for the producers, but also for the manufacturers and retailers,” says Block, referring to Sarine’s capability in tracing the flow of the diamond supply chain. “We see today increasingly growing trends within the ESG (environmental, social, and governance) segment and people wanting to know the whole journey from mining down to the consumer.”

The issue of traceability can be observed as important to luxury high-end retailers. In 2019, Tiffany & Co announced that it would provide sourcing information for individually registered diamonds of 0.18 carat or larger.

“We have about 100 million diamonds going through our technologies annually. We decided that we can use this information … to create a traceable record of the diamond from the mine through the manufacturer and down to the retailer,” says Block.

Meanwhile, he has observed that the diamond retail segment is rather old-school. In several retail stores, polished diamonds are still graded manually. “Till this day, graders would pick up the diamond, look at it and grade it according to their experience. We have turned this process into a technology-based one,” says Block, referring to Sarine’s latest e-grading products for the onsite in-house grading of a polished diamond’s 4Cs — colour, clarity, cut and carat weight.

This also eliminates the need for retailers to ship diamonds to grading labs and reduces the time lag in doing so. According to Block, the pandemic has caused a backlog of about 1½ months for diamonds to be graded in the labs.

With the e-grading technology, every retailer can customise Sarine’s AI-based technology according to their own in-house standards. Currently, Sarine is working with Tiffany to input the latter’s grading standards into Sarine’s technology.

Diamond in the rough

Recently, Sarine has caught the attention of analysts, due to its impending dual-listing. It helped, too, that Sarine recorded a turnaround in its latest FY2020 ended December 2020. Revenue between FY2019 and FY2020 dropped 20.2% from US$51.3 million to US$41 million.

However, thanks to operational improvements, better product mix, cost savings and government grants, Sarine was able to turn around with earnings of US$2.4 million versus losses of US$1.4 million.

Block points out that FY2019 was Sarine’s first red-ink year in over 20 years. Although FY2019 was before the Covid-19 pandemic, it was an especially tough year for the industry due to an oversupply situation from late 2018 to early 2020.

Despite a challenging FY2019, Sarine made it a point to maintain its R&D investments in new business capabilities such as e-grading and traceability. “We would rather absorb that loss in FY2019, than cut back on expenditure and slow down our progress. I think that in retrospect was a good decision, as it better prepared us for FY2020,” he says.

To be sure, despite the turnaround, FY2020 was not an easy year, as business activities were disrupted for several months because of the pandemic. “We took aggressive steps to manage the Covid-19 situation. On the one hand, we cut costs quite dramatically, and on the other, we tried to minimise the impact on our R&D activities,” says Block.

According to Block, if it was not for the group’s recurring revenue, the numbers would have been lower. Some 10 years ago, Sarine barely had any recurring revenue, with 95% of its revenue back then coming from capital or one-off revenues. “If you look at our revenue structure today, we have about 40%-50% of recurring revenue, and that is due mainly to our Galaxy family of products,” he explains.

As at June 8, shares in Sarine have increased about 45.2% YTD to trade at 60.5 cents, giving it a market capitalisation of about $211.6 million and a P/E of 68.2 times.

The improvements at Sarine had drawn a slew of favourable calls from analysts. On May 7, KGI Securities initiated coverage on the stock with an “outperform” recommendation and a target price of 65 cents. According to analyst Kenny Tan, sales of rough diamonds are back at healthy levels and Sarine should benefit from a normalisation of industrial activity.

“We like Sarine’s turnaround story, although the return of Covid-19 cases in India could dampen business recovery in the latter half of 2021,” says Tan, who expects sales to rebound by 25% in FY2021 and for the group to return to profitability levels similar to those of FY2017 (US$5.8 million) and FY2018 (US$7.6 million).

“Profit margins are unlikely to reach the high double digits as enjoyed by Sarine in the past, as management expects to continue spending to push out e-grading and Diamond Journey,” he adds.

Maybank Kim Eng, meanwhile, also initiated coverage on May 28 with a “buy” call and a 70 cents price target. “We expect Sarine to post cyclical earnings uplift in tandem with the recovery of the global diamond industry. The successful dual listing on TASE by 2QFY2021 and better-than-expected adoption rate for its e-grading could further catalyse the stock,” says analyst Eric Ong.

Having managed the turnaround, Block is not staying still for sure. Sarine will be focusing on growing its presence in the mining and retail segments with its Galaxy and e-grading technologies. “Over the next five years, we have plans to double our revenue in those segments. But it is all a matter of creating acceptance in the industry. Once that acceptance has been created, we believe that the growth will increase significantly,” says Block.

Photo: Bloomberg