Israel and Hamas agree to Gaza ceasfire plan

 

DBS Group Research is keeping its " fully valued&rdquo call on Sarine Technologies U77 0.00% at a reduced target price of 25 cents against 30 cents previously, as economic uncertainties continue to cloud the diamond industry&rsquo s outlook.

 

Following the company&rsquo s 3QFY2023 results ended Sept 30, analysts Sachin Mittal and Amanda Tan lowered their target price, which is now pegged to 21x FY2024 earnings. This is below the historical mean due to the continued softness in diamond markets. 

 

They write: &ldquo Accordingly, we reduce our FY2023 and FY2024 revenue estimates by 14% and 15% respectively. We also cut our earnings forecast for FY2023 and FY2024 by 89% and 16% respectively, on weaker-than-expected 9MFY2023 results for FY2023 and a top-line reduction in FY2024.&rdquo

 

The analysts understand that inclusion mapping comprises around 60% of Sarine&rsquo s total sales and the company retains market dominance in this area, with over 90% of the market share for stones over 2.5 carats. 

 

They add: &ldquo Sarine also leverages its strong presence across the supply chain to roll out new higher margin offerings beyond diamond manufacturing, which could enhance its growth prospects.&rdquo

 

In 3QFY2023, Sarine&rsquo s revenue of US$ 10.4 million ($13.9 million) was a 28% y-o-y fall, due to the continued weakness in midstream manufacturing activities. 

 

Scanning revenues were comparably less impacted and overall recurring revenues rose to 72% in the quarter, against 60% in 1HFY2023. 

 

Mittal and Tan write: &ldquo The trade-related services business is, however, gaining good traction, comprising 32% of sales at US$ 3.3 million in 3QFY2023, against 17% at US$ 4 million in 1HFY2023. 3QFY2023 fell into a net loss position at -US$ 1 million, below expectations.&rdquo

 

Meanwhile, Sarine&rsquo s gross profit margin contracted in 3QFY2023, to which the analysts attribute to a lower revenue base and product mix. 

 

The company has also introduced an off-market share buyback offer, and will purchase up to 4 million shares at 34 cents each, approximately 1.15% of its issued capital base. 

 

&ldquo Sarine has committed $1.4 million to the share buyback, which will be funded by company profits accrued over the past two years,&rdquo note the analysts.

 

Industry view

Mittal and Tan note that India&rsquo s call for a two-month freeze on rough imports from mid-October to mid-December to stabilise the demand-supply dynamic reflects weakness in the diamond midstream. 

 

They write: &ldquo We believe that this is indicative of slow demand in diamond markets in light of sluggish sales in the US, new sanctions expected in early 2024, and cannibalisation from LGDs (lab grown diamonds), particularly in the price-sensitive segment of smaller diamonds. This is clearly evident in India&rsquo s 9MFY2023 polished exports, which are down 24% y-o-y to US$ 14.05 billion.&rdquo

 

The analysts continue that they do not expect a complete cannibalisation of natural diamonds, given the &ldquo fundamentally different propositions&rdquo in social and emotional value against LGDs, writing: &ldquo Sarine also has several offerings targeted at LGD, that could cushion the impact of natural diamonds cannibalisation.&rdquo

 

Outlook

 

The effect of India&rsquo s existing sanctions have &ldquo somewhat been circumvented&rdquo according to Mittal and Tan, as Russian diamonds that are substantially transformed in India continue to flow into the global diamond markets. 

 

They add that new sanctions, which are expected in early 2024, if implemented, could &ldquo help close loopholes&rdquo and drive increased demand for Sarine&rsquo s traceability offerings. 

 

Meanwhile, the analysts see that the Israel-Gaza conflict will likely be an overhang on sentiment, though no material direct impact is expected for now. 

 

&ldquo We understand that Sarine is working at maintaining business as usual despite the ongoing conflict. Operations are continuing but could see a slowdown with 10% of staff mobilised. For now, Sarine looks to be more impacted by the sluggish diamond markets than the Israel-Gaza conflict,&rdquo they add.

 

Despite the unpredictable nature of current macroeconomic conditions, Mittal and Tan observe that diamond prices appear to be stabilising with the IDEX diamond Index at the 107 level since mid-October. 

 

They believe that it is too premature to conclude that diamond markets are recovering, but continue to watch for signs of recovery, indicated by a sustained uptrend in polished diamond prices, growth in diamonds entering the pipeline, and lastly higher retail sales in major diamond markets, such as the US and China. 

 

SARINE Technologies : U77 0% is proposing to launch an off-market, equal access share buyback offer at S$0.34 per share.

 

On Monday (Nov 20), the developer and producer of diamond technologies said it believes the deal will enhance shareholder value by reducing its total number of shares in circulation, thereby raising the company&rsquo s earnings per share.

 

It added that the deal will also allow shareholders to realise their investments at a premium over the recent market prices of Sarine&rsquo s shares, without incurring transaction costs.

 

Daniel Glinert, executive chairman of Sarine&rsquo s board, said: &ldquo The directors believe that the company&rsquo s shares are significantly undervalued due to prevailing market uncertainties and are fully committed to creating long-term shareholder value. This offer is the first step in the company&rsquo s strategy to realise this substantial value.&rdquo

 

The group further intends to buy back up to four million shares, or 1.15 per cent of its issued share capital notwithstanding dormant shares, under the equal access offer exercise.

 

Based on the offer price this translates to about S$1.4 million, which Sarine said will be financed with company profits. Its directors believe this will not adversely affect the company&rsquo s working capital requirements or gearing levels, nor result in the company being delisted from the Singapore Exchange.

 

To increase the number of shares a shareholder may tender, directors of Sarine who currently hold shares in the company, along with its chief executive, will not be participating in the equal access order.

 

The equal access offer will be made through an offer letter which the group intends to dispatch to its shareholders in due course.

 

Separately, Sarine announced that it recorded a net loss of just under US$1 million for the third quarter ended September, due to lower revenue and a reduced gross profit margin. This contrasts with the group&rsquo s Q3 net profit of US$2.2 million announced in the same period the previous year, when the group also announced a special interim dividend of US$0.005.

 

Revenue for Q3 FY2023 fell 28.3 per cent on the year to US$10.4 million from US$14.5 million, amid lower demand for polished diamonds and a drop in their prices.

 

The group said this was due to a combination of macro-economic uncertainties in the United States &ndash which continued to affect consumer confidence and retail sales &ndash along with economic woes in China, Sarine&rsquo s second-most important market for polished diamonds.

 

It added that the holiday outlook remains uncertain as budget-conscious shoppers in the US may show a further shift to lab-grown diamonds, further denting sales of the group&rsquo s one to two-carat natural diamonds.

 

&ldquo The extent of this trend, and the overall end-of-year holiday season in the West and the Chinese New Year buying early in 2024, will determine how fast the natural diamond industry recovers,&rdquo said Sarine.

Sarine Technologies has signed a strategic cooperation agreement with the Delgatto Diamond Finance Fund (DDFF) to enable rough diamond financing on Jan 15. The DDFF is the largest non-bank diamond financing entity and offers flexible, collateral-based structures to the global diamond industry value chain today.

 

The fund will be introducing a new service for rough diamonds, which will employ Sarine&rsquo s technological solutions for its unique way of mapping, identifying and evaluating rough diamonds.

 

Named Del Gatto 360, Powered by Sarine, interested parties will now be able to finance the rough diamonds they have with end-to-end traceability fully documented by the Sarine Diamond Journey solution, says Sarine.

 

It adds that the unveiling of the new service will enable DDFF to &ldquo significantly&rdquo increase the amount of capital it provides to the rough sector of the supply chain, as well as expand the types of structures it offers.

 

In addition, the agreement is said to create a complete solution for entities in the diamond industry to easily access finance for sourcing of rough diamonds, as well as a full turnkey solution to manufacture and even sell the polished output. Before the establishment of the service, assessing rough diamonds was an &ldquo inaccurate subjective process, at best&rdquo .

 

Under the agreement, Sarine will be remunerated based on a percentage of the financing extended by the DDFF, with additional remuneration, if the financed entity opts for the Del Gatto 360 extended services &ndash manufacturing and, or sales.

 

&ldquo For the first time ever, all the elements of the diamond supply chain are aggregated and made simple due to the joining of Sarine&rsquo s technologies and DDFF&rsquo s alternative financing solutions. This opens up the sourcing process to everyone in the industry, even companies without the skill set of rough analysis or manufacturing, as well as providing the financial help to those that don' t have the required capital. A seat is now being offered at what used to be a very exclusive table,&rdquo says Chris Del Gatto, chairman and CEO of the DDFF.

 

&ldquo We are thrilled to support our industry in yet another one of its requisite pillars &ndash efficient financing. This is another example of our implementation of our strategy to create added value for our customers by utilizing the extensive data we generate throughout the diamond value chain, value which goes way beyond diamond manufacturing,&rdquo says David Block, CEO of Sarine Technologies.

 

He adds: &ldquo I am confident that the DDFF will now be able to increase the capital it injects into the market in a way that will create additional opportunities for the entire industry, in general, and particularly our many mutual clients.&rdquo

MAINBOARD-LISTED Sarine Technologies : U77 -1.15%, which develops technology for the diamond industry, said in a first-quarter update on Sunday (May 15) that it has not seen any material impact on its business from geopolitical developments such as the war in Ukraine.

 

Israeli-based Sarine Tech reported revenue of US$15.6 million in the 3 months to Mar 31, 2022, down 9.9 per cent on what it called an &ldquo exceptionally strong&rdquo year-ago period. Net profit was &ldquo just under US$3.4 million&rdquo , said the company, citing &ldquo ongoing beneficial tax rates&rdquo .

 

&ldquo Sanctions notwithstanding, the flow of rough diamonds into the value chain, including those of Russian origin, continued unabated in the first 3 months of 2022,&rdquo Sarine Tech added. The trade of rough and polished diamonds made up 11.6 per cent of its overall revenue for the period.

 

Still, the company noted that that stricter sanctions on Russian rough diamonds were introduced in April, with Russian diamond production group Alrosa one specific target.

 

&ldquo These sanctions have reportedly had a more pronounced effect on the flow of Russian production, which accounts for some 35 per cent of the total world output, into the midstream polishing segment, though it is not yet clear to what extent,&rdquo said Sarine Tech, adding that it continues to closely monitor the situation around the conflict in Ukraine, which Russia invaded in February.