Sarine trades on a trailing 12-month P/E of 24.3x. Consensus shows 2017 and 2018 forecast P/E of 20.3x and 14.6x respectively, and expected EPS growth of 19% and 40%. We note there are only two broker estimates for the forecast period.
Sarine’s valuation and upside is mainly dependent on its expansion in the downstream segment, which should further support earnings growth and improvements in profitability and returns. Some premium can be expected given Sarine’s industry position and leadership in technology.
ROE has scope to improve towards 2014 levels (34%) as the company believes it has passed the peak of its current investment cycle and that 2017 represents a transition year where expenditures peak while revenues from investments can become meaningful from 2018.
Success in the downstream polished diamond businesses could support earnings growth and a valuation re-rating. We have not identified comparable listed peers against which to evaluate Sarine. In the peer comparison table (Exhibit 9) we show two Indian companies, primarily engaged in midstream manufacturing. On historic P/E, these companies are modestly valued compared to Sarine, which is reasonable in view of the low margins, market fragmentation and volatile earnings that characterise this segment of the market. Low historic dividend yields indicate possible pressures on financing and the need to preserve cash. Given Sarine’s focus on expanding into the downstream market, it is instructive to look at players in this area with strong brands and balance sheets. Chow Tai Fook (the largest jewellery retailer in China and Hong Kong) and Tiffany & Co both trade at significant premiums to Sarine on forward P/E, but at similar EV/EBITDA levels. The P/E premiums are likely a reflection of their very strong brands and market positions in jewellery retailing. Chow Tai Fook also stands out because of its yield of nearly 6%.
Exhibit 9: Peer comparison
|
Market cap (bn) |
Trailing 12-month PE (x) |
P/E (x) |
EV/EBITDA (x) |
Dividend yield (%) |
|
|
|
2017e |
2018e |
2017e |
2018e |
2017e |
Gitanjali Gems |
INR7.97 |
5.06 |
N/A |
N/A |
N/A |
N/A |
N/A |
Asian Star |
INR11.36 |
15.45 |
N/A |
N/A |
N/A |
N/A |
N/A |
Chow Tai Fook |
HK$86.8 |
32.12 |
26.94 |
22.88 |
16.66 |
14.86 |
3.29 |
Tiffany & Co |
US$11.59 |
22.73 |
21.65 |
21.83 |
10.68 |
10.06 |
2.18 |
Sarine Technologies |
S$611.2 |
34.12 |
20.57 |
14.76 |
13.71 |
10.15 |
3.43 |
Source: Bloomberg. Note: Prices as at 30 May 2017.
Management, organisation and corporate governance
Sarine is listed in Singapore and incorporated in Israel, and follows the corporate governance requirements of these jurisdictions. The important principles, which are aligned with the UK Corporate Governance Code, are as follows:
■
There are at least three independent directors.
■
The CEO and chairman roles are separated.
■
The members of the audit committee should be composed of independent directors.
Sarine has seven members on its board of directors including four independent directors.
At the recent AGM on 25 April, three longstanding directors retired and a new director, Ms Varda Shine, was appointed. Ms Shine has over 30 years’ experience in the diamond industry and was CEO of De Beers’ Diamond Trading Company (DTC) between 2006 and 2014. The company is considering seeking additional directors to the board to add experience and diversity, in particular in the area of polished diamond retailing.
On 1 May 2017, longstanding CEO Uzi Levami retired and was replaced by David Block, previously the group’s deputy CEO and chief operating officer.
Key members of management and board:
■
Daniel Glinert, chairman of the board. Mr Glinert has been an executive director and chairman of the board since 1999. He has over 40 years’ experience in various high-tech industries (including military, semiconductor and industrial applications) in research, development and management positions in Israel and the US. Mr Glinert founded and managed Interhightech in 1982. Prior to that, from 1997 to 1982, he worked for E-Systems Inc (now a division of Raytheon) on a development programme for the Israel Air Force. Mr Glinert served in the Israel Air Force.
■
David Block, CEO since May 2017. Mr Block was the group’s deputy CEO and chief operating officer since 2012. He joined Sarine in 2001 and, prior to becoming deputy CEO and COO, held various positions in the group including CEO of Sarine India and VP of sales where he was responsible for the group’s worldwide sales. Mr Block holds an MBA from Kellogg-Recanati School of Business, a joint degree with Northwestern in the US and Tel Aviv University.
■
William Kessler, chief financial officer. Mr Kessler joined Sarine in 2009 with over 25 years of corporate and Wall Street experience, working with publicly listed and private companies in the US and Israel.
■
Abraham Kerner, VP of research and development. Mr Kerner has held this position since 2009, prior to which he was chief technological officer. He is an engineer by background with expertise in precision motion control systems and accurate measuring machines for diamonds. He joined Sarine in 1995.
■
Ron Ben-Ari, VP of product management with responsibility for all the company’s products. Mr Ben-Ari joined Sarine in 2003. From 2013 to 2016 he was responsible for the midstream businesses, including inclusion scanning solutions and rough diamond planning products. He managed the launch and first years of the Galaxy products. Mr Ben-Ari holds an MBA from the Kellogg-Recanati School of Business.
■
Rajesh Kothari, general manager Sarine India. Mr Kothari is responsible for the overall management of the operations and business in India. He has over 25 years’ experience in the diamond industry and prior to joining Sarine in 2013, was head of global manufacturing for Shrenuj & Co a diamond manufacturer listed in India.
Exhibit 10: Major shareholders and free float
Name |
Ownership (%) |
Mondrian Investment Partners |
8.97 |
Harel Ehud* |
7.35 |
Stark Hanoh* |
7.01 |
Fidelity International (FIL) |
6.57 |
Wang Wu Huei |
4.92 |
Eshed Avraham* |
4.41 |
Mashiah Eyal* |
4.41 |
Glinert Daniel* |
3.53 |
Levami Uzi* |
3.52 |
Baillie Gifford |
3.10 |
Free float** |
45.00 |
Name |
Mondrian Investment Partners |
Harel Ehud* |
Stark Hanoh* |
Fidelity International (FIL) |
Wang Wu Huei |
Eshed Avraham* |
Mashiah Eyal* |
Glinert Daniel* |
Levami Uzi* |
Baillie Gifford |
Free float** |
Ownership (%) |
8.97 |
7.35 |
7.01 |
6.57 |
4.92 |
4.41 |
4.41 |
3.53 |
3.52 |
3.10 |
45.00 |
Source: Bloomberg and Sarine. Note: *Sarine directors and recently retired directors. **As at 17 March 2017.
■
Profitability of midstream manufacturers. The majority of Sarine’s customers are midstream manufacturers in India, which command thin profit margins in the low single digits. As witnessed in 2015, revenues are very sensitive to the health of this industry segment, which can be affected by factors including the pricing and supply of rough stones, the pricing and demand for polished diamonds, and the availability of financing for working capital. Over time revenues can become less dependent on equipment sales to the midstream industry as the proportion of recurring revenues increases and as the company diversifies its customer base into the downstream segment of the industry.
■
Global growth trends. As a luxury good, end-demand for polished diamonds is sensitive to the macroeconomic environment. The US continues to be the most important market, accounting for 45% of polished diamond demand by value in 2015. More volatile demand comes from the second and third largest markets of China (14%) and India (7%), where government policies also pose risk as witnessed by a sharp downturn in luxury goods spending in China in response to an anti-corruption campaign in 2014 and 2015. Demonetisation in India could have potentially disrupted demand, although the company observes this has not been the case so far and does not view this as a significant risk factor.
■
Infringement of copyright. Sarine’s products are proprietary and its ability to maintain its leading market position is dependent on its ability to protect its intellectual property. Although Sarine has registered numerous patents and trademarks in countries key to its businesses, enforcement is key. The company is currently pursuing infringements and pirating of software packages, particularly for the Advisor rough planning software. As part of its IP protection strategy, the company has designed more protective features for its systems, based on cloud computing technology, with key components remotely located on cloud servers, not on installed systems.
■
Liquidity. Sarine’s shares are relatively illiquid. For the year to end April 2017 the stock traded an average value of US$230,000 per day.
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