0.61
THIS REPORT HAS BEEN PREPARED BY MAYBANK KIM ENG RESEARCH
SEE PAGE 20 FOR IMPORTANT DISCLOSURES AND ANALYST CERTIFICATIONS
Co. Reg No: 198700034E MICA (P) : 099/03/2012
Tear Sheet Insert
Sarine Technologies (SARINE SP)
Ride the earnings upcycle; Initiate BUY
Sarine mainly engages in the development and manufacturing of advanced systems for diamond technologies. We are initiating coverage with a BUY and DCF-based TP (WACC: 8.6%, LTG: 2%) of SGD0.70. Our intrinsic value implies 17.9x FY21E P/E and 14.4x FY22E P/E, compared to >20x during the previous upcycle. We expect Sarine to post cyclical earnings uplift in tandem with the recovery of the global diamond industry. The successful dual listing on Tel-Aviv Stock Exchange by 2Q21 and better-than-expected adoption rate for its e-Grading could further catalyse the stock.
e-Grading business could be the game-changer
Sarine's e-Grading™ (on-site in-house grading of a polished diamond 4Cs) is currently in beta-testing with two leading Indian manufacturers, and on track for its introduction to the market later this year. The Group has an ongoing initiative with Tiffany & Co. to adapt its technology to their stringent grading criteria, and are also working with NGTC to derive new technology-based standards for them. We conservatively assume the Group is able to capture just 1% of USD500m market size of diamond grading in its FY22E top-line.
Expands market penetration of Galaxy®family
The strong rebound in manufacturing activities which started in 4Q20, is continuing in 2021.This has driven the utilisation of its inclusion mapping systems to peaks of 95,000 stones daily, a throughput 40% higher than pre- pandemic usage. Sarine is aggressively pushing sales programmes of its systems for smaller stones, particularly the Solaris™, Meteor™ and Meteorite™ models. It expects to see significant deliveries of Galaxy® family systems in 2021, with some backlog of orders delayed in 1Q21 due to lingering pandemic-related logistical issues.
Growing demand for lab-grown diamonds
The market for lab-grown diamonds (LGDs) has grown by 15-20% annually in the past few years due to increasing demand from millennials given its eco-friendly attributes. While they still comprise a relatively small part of global polished diamond volumes, estimated at c.3-4%, Sarine is focusing its efforts to penetrate this rapidly growing market. The Group has already generated revenues from this niche segment as its manufacturing-related, grading and retail/branding technologies are all applicable to LGD.
Share Price SGD 0.61
BUY
for the processing, grading and trade of diamonds.
Axxion S.A
Ehud Harel
Sarine Technologies - (LHS, SGD)
-1M -3M -12M
Source: FactSet
Revenue 51 41 55 65 71
EBITDA 5 9 17 20 23
Core net profit (1) 2 10 13 15
Core EPS (cts) (0.4) 0.7 2.9 3.6 4.3
Core EPS growth (%) nm nm 330.5 24.3 17.8
Net DPS (cts) 0.8 0.5 1.5 2.0 2.5
Core P/E (x) nm 47.0 15.7 12.6 10.7
P/BV (x) 1.6 1.8 2.4 2.2 2.1
Net dividend yield (%) 2.9 1.6 3.3 4.4 5.5
ROAE (%) (2.2) 3.9 16.1 18.5 20.0
ROAA (%) (1.8) 3.0 12.3 14.4 15.9
EV/EBITDA (x) 13.5 10.6 7.9 6.5 5.5
Net gearing (%) (incl perps) net cash net cash net cash net cash net cash
Consensus net profit - - na na na
MKE vs. Consensus (%) - - na na na
May 28, 2021 2
entire value chain given its full suite of equipment for
diamond and gemstone production.
technology that automates inclusion mapping, helping
clients maximise yields of their rough diamonds.
Introduces new technologies for polished diamonds that
could help retailers and wholesalers enhance
differentiation of polished diamonds, potentially setting a
new industry standard.
Strong barriers to entry given technological lead that is hard
to replicate and established customer base.
Sarine’s technologies span entire value chain
Source: Company
Price Drivers
1. Signed a cooperation agreement with GGTL Laboratories
to address the detection of lab-grown diamonds of all
sizes.
2. Sets a new standard in rough diamond planning accuracy,
efficiency and yield with its introduction of an added-
value upgrade for existing or new DiaExpert® platforms.
3. Works with Tiffany to adapt its automated AI-based
grading technology to Tiffany’s discriminating grading
standards for colour and clarity.
4. Introduces the concept of e-Grading™ in 2020, a self-
executed polished diamond 4Cs grading by industry players
on-site at their own facilities utilising its AI-driven cloud-
linked technologies.
5. Apply for dual listing on Tel-Aviv Stock Exchange to reach
a broader audience of investors.
Financial Metrics
technological aspect of businesses.
New products are on a unique recurring revenue model that
will increasingly cushion lumpiness of equipment sales for
traditional products.
margins in excess of 80%.
Strong balance sheet with a net cash position.
EPS, FCF per share and DPS
Source: Company, Maybank Kim Eng
Swing Factors
models.
adopted as an industry standard by retailers and gemlabs
in measuring and grading polished diamonds.
The commercial rollout of its e-Grading™ offering in 2H21
should drive higher recurring income and margins.
Downside
Economic uncertainty may reduce consumer spending on
diamond jewellery, thus leading to less polishing and retail
activities.
ericong@maybank.com
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Sarine Technologies - (LHS, SGD)
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Business Model & Industry Issues
As a leading developer of technologies for the diamond industry, Sarine seeks to improve efficiency and productivity in the
sector. Over the years, the group has managed to revolutionise the diamond polishing/manufacturing industry. It introduced
various reliable, efficient, yield-increasing, cost/risk-reducing and time-saving technologies.
The global diamond industry has adopted its innovative technologies, many of which have become de-facto industry
standards, improving the yield of the polished stone(s) weight over time by over 25%.
Its introduction of technology to the industry also contributed to the migration of manufacturing from historic diamond
polishing centres in developed countries (e.g., Belgium, Holland, Israel and the US) to lower cost centres (such as India,
South Africa, China and others). Today, the midstream diamond industry is concentrated in India.
Material E issues
balance of the environment and does not have any material
influence on the sustainability of the industry or the
human/natural fabric in which the group operates.
Its technology allows better use of raw materials, efficient
production and increased output from the rough diamond.
This reduces environmental damage through proper
utilisation of natural resources and minimising energy use.
To ensure proper safety and usage of its products, it
complies with the EU directive WEEE, which applies to
recycling products/components and provides that no
electrical or electronic equipment may be discarded into a
city’s normal waste disposal system.
It did not have any incidents of non-compliance with
regulations resulting in a fine, penalty or warning in 2019.
Key G metrics and issues
The board consists seven directors, the majority (4) of
whom are independent. Two of those directors, namely
Ms. Valerie Ong Choo Lin and Mr. Yehezkel Pinhas Blum
also qualify as “external directors” under Israeli law i.e.
they reside in Israel and not related with the controlling
shareholders.
are chaired by independent directors.
Axxion and Ehud Harel’s deemed stakes in the company
are 9.18% and 7.36% respectively. Executive Chairman,
Daniel Benjamin Glinert owns 3.5% interest, while non-
EDs - Avarham Eshed (4.3%) and Uzi Levami (3.5%).
Appointed new independent directors for three-year
period in 2020 and the group sees this as an opportunity
to bring fresh perspective and ideas to the board.
Key management/ directors’ compensation accounted
for 25.2%/8.3% of total employee compensation in 2020.
Auditor is Somekh Chaikin, an Israeli partnership and a
member firm of the KPMG International.
To protect employees against sexual harassment or the
abuse of power in the workplace, Sarine has
implemented a prohibition against harassment in the
entire Group and established a Sexual Harassment
Prevention Policy.
arose against any member of the Group or its employees
during 2019.
corruption legislation and regulations.
Sarine aims to recruit its senior management from the local
communities. About 60% of senior key management in Sarin
India are locals, of which, about 50% of its senior
management is female.
its ability to remain competitive in the market is also
dependent on its ability to protect its intellectual property
in both hardware and software.
The group has registered and maintain numerous patents,
copyrights and trademarks in countries key to its business,
and additional patent and trademark applications are
pending in various phases in diverse geographies.
Sarine has initiated litigation in India against certain
competitors, whom it believes infringed its patents on laser
marking, as well as against those who have infringed on or
fraudulently made use of its Galaxy® inclusion mapping
patents and Advisor® planning software copyrights.
The group’s entire supply chain consists of over 700 active
suppliers with the majority of its operations and business
conducted with about 50 of them.
May 28, 2021 4
Source: Company data
Source: Company data
Source: Company data, Maybank Kim Eng
Fig 5: Free cash flow and capex
Source: Company data, Maybank Kim Eng
Fig 6: DPS and payout ratio (%)
Source: Company data, Maybank Kim Eng
72.5 58.6 58.5
USDm
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May 28, 2021 5
GLOSSARY
1) Scanning: Create a 3D virtual model of the stone in order to accurately provide the dimensions, structure, and facet arrangement of the diamond. With the online model of the stone, the designers can then accurately create proportional sections of the jewellery so that it is as aesthetically pleasing as possible once assembled.
2) Inclusion mapping: Inclusions are small imperfections within
a diamond that are created due to the extreme pressure and heat that diamonds experience when they form. To maximize the value of polished diamonds, any inclusions present in the rough diamond must be detected and mapped to assess the quality of the diamond. Once this is accomplished, the optimal method of cutting can be planned to maximize the value of the cut diamond or diamonds obtained from the rough stone.
3) Grading report: Determines the dollar value and is based on the “4 C’s” i.e., Colour, Clarity and Cut (proportion, polish and symmetry), which are the quality elements. Carat weight determines the value of a stone, while Clarity is frequently assumed to be the most important. However, colour and cut, in particular, have the greatest effect on the appearance of a diamond.
4) e-Grading™: Diamond grading at the source - on the manufacturing floor,
in the wholesaler’s showroom, at the jewellery store, on any mobile device. This helps to reduce costs, accelerated time to market, enhanced retail experiences, and better results for everyone - manufacturers, wholesalers, retailers, and customers alike.
5) Galaxy® family: Scan a rough diamond internally and externally. With the three-dimensional information, manufacturers would be able to design and plan what polished diamonds can result from a rough diamond. It comes with the various models, the Meteorite™, Meteor™, Solaris™, Galaxy® and Galaxy® XL systems, covering a broad range of sizes of rough diamonds from below 10 points (0.1 carat) to over 200 carats in weight.
6) Sarine Profile™: Offer succinct image and video information of a diamond's quality and beauty, to enable online transactions with a completely new level of confidence and cost effectiveness, and enhancing the in-store buying experience by empowering the consumer to make a truly informed decision. This allows jewellery chains to offer any stone from their entire (virtual) inventory, regardless of its availability in a specific outlet.
7) Sarine Diamond Journey™ Traceability: Just like a new-born, every rough diamond emerging from the mine has its own birth registration ID. At the mine each rough stone is digitally scanned, creating a unique 3D model. Other important identifying data, such as country of origin, is registered and the data is uploaded to its secure cloud-based system.
8) Lab-grown diamonds (LGD): Sometimes referred to as synthetic
diamonds and they actually consist of carbon atoms structures that displays the same chemical and optical characteristics of a natural diamond crystal. However, LGD prices are generally much lower than natural diamonds, and not having any resale value due to mass production in recent years.
May 28, 2021 6
1. Investment thesis
1.1 Moving downstream with e-Grading™ revolution Demand for grading reports has grown significantly over the past 20 years. Today, diamonds as small 0.2 carats are sold only with a report from a reputed lab to provide buyers and/or consumers, with reassurance. That said, reports for the same type of diamonds can have differences that translate into 20-40% lower prices. In 2020, Sarine introduced the concept of e-Grading™ by enhancing its technology-based AI-derived 4Cs grading with additional functionality for process control and intra-process verification. This will provide manufacturers and other industry players with a time-saving cost-cutting in-house solution for the 4Cs grading of polished diamonds, without necessitating the inefficient and costly process of going offsite to a gemmological laboratory (hence the “e-Grading™” term, just like e- Learning is from the comfort of your home). The systems utilised for the grading process are all cloud linked and the grading results are automatically uploaded to the cloud. Thus, the 4Cs grading results are derived without any human intervention and are immediately available for online B2B access and subsequent B2C consumer report generation. Intra-process automated verification of the polished diamond at each station will ensure reliable and accurate data flow, optionally verifiable by its TruMatch™ fingerprinting.
Fig 7: Ushers in era of in-house grading
Source: Company< Business Times
Source: Company
All its technologies generate cloud-based data for immediate anytime anywhere accessibility on mobile devices, a key factor for appealing to the new 21st century consumer. It intends to leverage on this trend to accelerate the group’s market penetration and broaden its market share. It has significantly increased its sales staff in the key APAC market and it’s investing in end-market retailer and consumer recognition of its brand. Its new grading paradigm enables truly objective and consistent grading at a fraction of the time currently required (hours or a day max vs. weeks) and with none of the indirect costs of shipping, insurance, customs handling, etc. associated with having the grading done at an external third-party lab.
May 28, 2021 7
Sarine Technologies
Notably, it also offers operational flexibility, as the polishers can prioritise their stones' sequence of grading to best meet their delivery schedules. Late in 2020, the group began initial beta-testing of this new concept in India. According to management, the 1H21 will be dedicated to the ongoing refinement of the solution and implementation of the necessary operational cloud infrastructure. Commercial launch with broader introduction to midstream polishers is scheduled for later in 2021, along with its specific efforts vis-à-vis the NGTC lab in China and leading wholesalers and retailers such as Tiffany & Co. and Japan's QVC. Sarine aims to capture up to double-digit share of USD500+m annual market of diamond grading in the long term, where Gemological Institute of America (GIA) is currently the dominant player in this segment.
1.2 Technologies spanning the entire value chain Through its application of patented solutions (proprietary mechanics, electronics, optics, lasers and sophisticated software), Sarine has become a recognised leader in the development of systems used throughout the entire diamond value chain, from mine to retail, from rough diamonds evaluation, planning and polishing to polished diamonds grading and trade.
Fig 9: Capturing profits at all stages of the diamond trade
Source: Company
The group has launched aggressive marketing offerings to target specific sub-segments of the midstream diamond industry. Its new marketing promotions are aimed at enabling smaller businesses to acquire its systems on cost-effective terms – for instance, a package specifically offered to polishers of very small stones a tenth of a carat rough and under. Management expects these promotions will drive significant sales of its Meteorite™ and Meteor™ systems. It is also proactively launching a new initiative aimed at re-establishing substantial demand for its Solaris™ model for mid-sized rough stones (from 1 to 2 carats in weight). Meanwhile, we expect Sarine to continue its market domination of inclusion scanning and mapping, rough planning and related manufacturing products and services. In 2021, the group will also launch its Advisor ® 8.0 with enhanced features, thus widening technological gap with piracy.
May 28, 2021 8
Sarine Technologies
1.3 Increasing acceptance of lab-grown diamonds Synthetic diamonds, or more accurately termed, lab-grown diamonds (LGD) continued to expand in 2020 though they still comprise a relatively small part of global polished diamond volumes, estimated at ~3-4%. However, they have recently gained huge popularity and are reportedly in demand from millennials attracted by LGD makers' claims of being eco-friendly. Studies indicate that the demand for LGD is expected to remain on its expansion path in 2021 with nearly half of US retailers already offering LGD products in their stores. This usually forms part of their inventories given LGD is increasingly seen as a lower-priced complementing product to natural diamonds. Fig 10: Estimated market size of lab-grown diamonds
Source: Statista
This growing market acceptance of LGD provides a new opportunity for Sarine. Having verified the applicability and adaptability of its various technologies to LGD manufacturing, grading and trade, the group has extended its marketing efforts to penetrate this growing market. Its traceability and e-Grading™ solutions can also be applied to LGD to ensure a verifiably sustainable supply of diamonds in a rapidly changing consumer environment. The Galaxy® inclusion mapping and Advisor® planning technologies can contribute to the optimal utilisation of the manufactured LGD raw material. Sarine is complementing the Galaxy® software with pattern recognition capabilities, in order to automatically discern between natural and LGD rough material and automatically adjust the billing for the scanning service. Its Quazer® 3 has proven to be the most cost-effective offering for dicing the LGD wafer into the cubes from which the gems are polished. In fact, its AI-based e-Grading™ is especially applicable to LGD grading, as it allows grading of the less expensive finished LGD gem at a much more affordable cost than that charged for grading services by common gemmological laboratories. Sarine recently entered into a strategic collaboration agreement with the Constell Group to forge a closer cooperation that will quickly and efficiently provide technological solutions for the current and evolving needs of the rapidly expanding LGD segment. This will allow customers to benefit from more competitive pricing as the business model remunerates Sarine based on each stone processed, regardless of the specific technologies applied in the processing.
May 28, 2021 9
Established in 1988, Sarine Technologies is a recognised leader in the development and manufacturing of advanced modelling, analysis, evaluation, planning, processing, finishing, grading and trading systems for diamonds.
Fig 11: From rough stone to polished diamond
Source: Company
Its products include the Galaxy® family of inclusion and tension mapping systems, rough diamond planning & optimisation technologies, laser cutting & shaping tools, laser-marking, inscription & fingerprinting equipment, automated (AI-derived) clarity, colour, cut and light performance grading systems and traceability, visualisation and retailing services.
Fig 12: List of products by application and customer type
Source: Company
3. Industry outlook
3.1 Diamonds set to regain pre-pandemic sparkle The global diamond industry started on a path of recovery in 2H20, aided by the reopening of jewellery retail activities, leading up to the end-of- year holiday season, and the consequent resumption of diamond manufacturing activities. With vaccinations readily available and aggressive inoculation programmes being launched by governments worldwide, it is expected that the pandemic's effects will become less acute. Bain thus forecasts a very strong rebound in luxury goods spending of between 10-12% to 17-19% in 2021, depending on the actual macroeconomic conditions.
Fig 13: Strong rebound in demand from US and China
Source: The Economist Intelligence Unit; Euromonitor; OECD; Bain & Company
Fig 14: Recovery of global diamond jewellery market
Source: The Economist Intelligence Unit; Euromonitor; OECD; Bain & Company
As luxury dollars are not spent on travel or entertainment, due to lingering restrictions, it is forecast that there will be, as was witnessed in the 4Q20, a strong rebound in spending on diamond jewellery, in particular. It is projected that following 2021 diamond jewellery spending will continue growing at a more typical 3-5% annually, reaching 2019 levels for a full recovery to pre-pandemic levels by late 2022 or early 2023.
3.2 No material impact yet from Covid-19 outbreak in India According to the Group, the latest outbreak of Covid-19 in India has not yet had any material effect on its business. Though Mumbai, the centre of the polished diamond trade in India, is currently under lockdown, the diamond trade and bourse have been exempted. As for Surat, where the diamond cutting and polishing operations are located, there have not yet been any new official directives pertaining to the diamond industry, beyond the night time curfew, which has been in force from before the current outbreak. The curfew has had little to no effect, as the manufacturers' night shifts typically start before the curfew and end afterwards.
Polishing has slowed down somewhat due to absences of ill or quarantined workers, more so for the producers of smaller stones, whose facilities are less conducive to the required social distancing. The situation in India remains very uncertain, which may affect the value chain over the next 2- 3 months. But contrary to 2020, when the entire industry came to a virtual standstill due to global lockdowns, the current crisis, from the diamond industry perspective, is mostly limited to India, as the appetite for diamond jewellery looks relatively resilient in key consumer markets in the US and China (together accounts close to 60% of total global demand).
May 28, 2021 11
4. Financial analysis
Sarine suffered a net loss of USD1.4m in FY19 due to the substantial decline in the sales of rough diamonds by miners in 2019 that reduced polishing activities by over 25% for the year. The reduction of rough stones entering the pipeline led to lower recurring revenue from Galaxy scanning activities. As a result, this change in product mix severely impacted its GPM, which narrowed significantly to 57.6% (FY18: 65.9%; FY20: 66.1%). Nevertheless, a robust recovery in diamond polishing activities in the midstream has materialised in 4Q20, mainly due to diminished inventories of polished diamonds because of the lockdowns in India from late Mar-Jul, on the backdrop of improved retail activity worldwide in general, and an increased demand for polished diamonds.
As such, the group intends to be even more aggressive in offering attractive terms for acquiring its systems for smaller stones, tailoring its offerings to all types and sizes of manufacturers – e.g., a business model specifically for polishers of stones only 10 points and less.
We understand that Sarine will focus especially on its systems for smaller stones such as the Solaris™, as well as lower-end Meteor™ and Meteorite™ models, where the market remains fairly underpenetrated. Overall, management is expecting to see significant deliveries of Galaxy® family systems in 2021, including those sold on a one-off basis (see Fig 13), with some backlog of orders delayed in 1Q21 due to lingering pandemic- related logistical issues.
Fig 15: Total no. of deliveries of Galaxy® family systems
Source: Company, Maybank Kim Eng
Fig 16: Total no. of stones through its scanning systems
Source: Company, Maybank Kim Eng
Though the continued uncertainties from the Covid-19 crisis remains, Galaxy inclusion scanning during the initial months of 2021 has reached record levels, with peaks nearing 95,000 stones a day. This would imply a run rate that would annualise to over 25m stones, as compared to just over 17m stones in FY19and just under 19m stones in FY20. In other words, this should translate into higher recurring income (including Galaxy®-related scanning, Quazer® services, polished diamond related services and annual maintenance contracts), which typically accounts for almost 50% of Group revenue.
46
65
145
76
95
No. of systems delivey
Million
Source: Company, Maybank Kim Eng
The business model for e-Grading will be industry-standard per-carat charge (optionally packaged with light performance grading and Sarine Diamond JourneyTMtraceability). In the longer term, Sarine aims to capture up to double-digit share of the USD500m annual market for diamond grading. We believe a successful rollout of e-Grading in 2022 could further expand the Group’s recurring income and profitability given its GPM is similar to the higher-priced Galaxy® margins of ~80%. For now, we conservatively assume top-line contribution of USD5m or just 1% of annual market size in FY22E from this new segment.
Fig 18: Positive operating leverage to kick in
Source: Company, Maybank Kim Eng
Fig 19: DuPont Analysis
Source: Company, Maybank Kim Eng
On the expense side however, this may be partly offset by a reduction of Israeli government Covid-19 grants, while its R&D and marketing expenses should also normalise to pre-Covid level as the pandemic situation in the country improves. Note that gross margin was unusually high at 76.9% in 1Q21 due to sale of inventory previously written-off. While this may not be repeatable in subsequent quarters, we believe that Sarine’s positive operating leverage will progressively kick in along with a gradual shift to a better product mix.
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May 28, 2021 13
Sarine Technologies
5. Valuation
We initiate coverage on Sarine with a BUY and DCF-based TP of SGD0.70
(WACC: 8.6%, LTG: 2%). Our intrinsic value implies about 17.9x FY21E P/E
and 14.4x FY22E P/E, compared to >20x during the previous upcycle.
Rerating catalysts include stronger-than-expected contribution from e-
Grading business and better margins due to more favourable product mix.
Fig 20: DCF valuation
EBIT 21.1 24.2 27.2 30.1 33.3
Depreciation 4.0 4.0 4.0 4.0 4.0
WC changes 0.6 0.3 -2.0 -1.5 -1.8
Operating cashflow 25.6 28.5 29.2 32.6 35.4
Taxes paid 2.0 2.6 3.3 4.0 4.8
Cashflow from ops 23.6 25.9 25.9 28.6 30.6
Capex 3.5 4.0 4.5 5.0 5.5
Dividends/Interest income 5.2 7.0 8.7 10.5 12.2
Free cashflow 14.8 14.9 12.7 13.1 12.9
Terminal Value 197.6
PV of FCF and TV 13.7 13.8 10.8 10.3 151.9
Total discounted FCF 200.4 Less: Net debt/(cash) 17.8 Equity Value 182.5 No. of Shares 349.83 Equity Value per Share (USD 0.52 Ex. Rate 1.34 Equity Value per Share (SGD) 0.70
Assumptions: Cost of equity 8.9% Cost of debt 5.0% Debt/capital ratio 5.6% Tax rate 20.0% Risk free rate 2.5% Beta 1.1 Market return 8.5% Terminal growth 2.0% WACC 8.6%
Source: Bloomberg, Maybank Kim Eng
Seeking dual listing in Tel-Aviv Stock Exchange Meanwhile, the Group intends to seek a dual listing on Israel's Tel Aviv Stock Exchange (TASE), which is likely to be completed during the 2Q21. It will conduct an NDR (Non-Deal Roadshow) in Israel commencing late-May ’21, which would potentially expose the Group to a broader investing public. The move comes at an opportune time, and we should see greater interest in the stock (hence better trading liquidity) as the domestic institutional investors, are generally more receptive to and familiar with Sarine's business model. While there is no direct comparable, we observe that the forward P/E valuation for technology companies listed on TASE is about 20x on average (versus 15x in SGX).
May 28, 2021 14
Sarine Technologies
6. Risks
Resurgence of Covid-19 outbreak. Covid-19 severely affected the Group's operations for most of FY20. Demand for polished diamond jewellery fell substantially for the first nine months of 2020, when retail activities in the Asia Pacific, Europe and the US were restricted, on a rolling basis, for substantial periods. On the production side, full and partial lockdowns in India for over four months from the end-Mar ‘20 halted, or significantly reduced, all manufacturing and polishing activities in the world's major diamond manufacturing centre. Notwithstanding the rollout of global vaccination programme, the Covid-19 and its virus mutations may still affect the global diamond value chain in 2021. The prevailing economic uncertainty, lingering retail restrictions to varying degrees in various geographies and the postponed June JCK Show in Las Vegas to August are examples of the enduring uncertainties of the pandemic.
Infringement of intellectual property (IP). Its success and ability to
compete are substantially dependent on its IP, proprietary patented
technology and copyrighted software. The steps that the group has taken
and are taking to protect its IP rights may not be adequate, and it might
not prevail and be able to prevent others from using what Sarine regards as
its technology. If it has to resort to more extensive legal proceedings to
enforce its IP rights, for instance in the US, the proceedings could be
significantly more costly, and it may not be able to recover its expenses.
The group may be subject to claims by others regarding infringement of
their proprietary technology. In addition to ongoing legal proceedings, it
may in the future be involved in additional proceedings, initiated either by
the group or in response to claims by third parties.
Product liability and/or other claims. In the event that customers are
harmed or their stones or other properties damaged by the products the
group sells or the services it offers. Disruptions, failures or breaches of its
IT and cloud computing infrastructure could have a negative impact on its
operations and sales. Sarine provides retailers with reports and depictions
of certain diamond qualities and parameters, including, but not limited to,
light performance, the diamond's provenance, its 4Cs, Hearts and Arrows,
etc. If a retailer's end customer, or another third party alleges that Sarine’s
report is incorrect, or improperly relied upon, and the group is held
responsible, it could be subject to monetary damages. This is even if Sarine
is not contractually bound to such end customer to third party.
Execution hiccups. The group is continuously developing new product lines
for new industry segments and improvement in existing product lines, and
it’s expanding its marketing & sales efforts in its key market segments and
geographical areas. But there is no assurance that such expansion plans will
be commercially successful. If Sarine fails to achieve a sufficient level of
revenue, or if the group fails to manage its costs effectively, it may not be
able to recover its expenditures, and its future financial position and
performance may be materially and adversely affected.
Geopolitical instability. Sarine is located in Israel, and the concentration
of its management, R&D and manufacturing activities in the country
presents certain geopolitical risks. Notwithstanding the recent Gaza
conflict, the Group updated that its business activities have not been
affected by the rocket attacks into Israel or by the sporadic domestic unrest.
May 28, 2021 15
7. Key management
David Block is the Group’s CEO as of May 2017. Prior to his appointment as CEO he was Deputy CEO and COO since 2012, with responsibility for worldwide operations, worldwide sales, including the network of distributors / resellers, and customer care. In June 2009, Mr. Block was Deputy CEO and VP of Sales responsible for overseeing the Group’s worldwide sales, including its network of distributors / resellers and subsidiaries. Beginning Jan 2006, for a period of three years, Mr. Block was the CEO of Sarin India in charge of the overall management of the operations and business in India, responsible for over 70% of the Group’s revenues and the supervision of over 200 employees. Before being assigned to Sarin India, Mr. Block was a Product Manager responsible for all the products aimed at the diamond manufacturing market, commencing 2001. Prior to joining the Group, Mr. Block worked at several major Israeli high technology companies in the management of large-scale development projects, computer programming, quality assurance and technical writing positions. Mr. Block holds an MBA from the Kellogg-Recanati School of Business, a joint degree from Northwestern University in the US and Tel Aviv University in Israel, and a Bachelor's degree in Computer Science from the Tel Aviv-Jaffa Academic College in Israel.
Ron Ben-Ari is the Group's Deputy CEO (as of 2018) and VP of Product
Management, responsible for all its products' definition, marketing and
timely development since 2016. From 2013 through 2016 he was first the
Director, and then VP, of Diamond Manufacturing Activities for the diamond
industry midstream, including the Galaxy® family of inclusion scanning
solutions, rough diamond planning products, laser sawing and shaping
systems, polishing quality aids and polished diamond Cut finishing and
grading solutions. From 2005 to 2013 Mr. Ben-Ari acted as the Product
Manager of the rough diamond planning group of products and managed the
Galaxy® family of products during their first two years and spearheaded
their launch, initial marketing drive and acceptance, ongoing development,
etc. Since joining Sarine in 2003, Ron Ben-Ari managed the Quality
Assurance team, responsible for testing all of Sarine’s products. Mr. Ben-
Ari holds an MBA from the Kellog-Recanati School of Business, a joint degree
from Northwestern University in the USA and Tel Aviv University, and a
Bachelor’s degree in Computer Science from the IDC College in Israel.
William Kessler has served as the Group’s CFO since May 2009. He has
over 30 years of corporate and Wall Street experience, working with
publicly traded and private companies in Israel and the US. From 2006 until
2009 Mr. Kessler served as the CFO of XTL Biopharmaceuticals (Nasdaq:
XTLB; LSE: XTL and TASE: XTL) and was previously its Director of Finance
commencing Jan 2006, having served as a financial consultant to XTL during
2005, when he spearheaded the process of listing XTL for trading on the
Nasdaq. From late 2003 through 2005, he also served as a financial
consultant to Keryx Biopharmaceuticals (Nasdaq: KERX), following the
relocation of its headquarters to New York, after having served as their
Controller in Israel from 2001 until September 2003. From 1996 to 2000, Mr.
Kessler served as CFO for Interhightech (1982) Ltd. (founded by Mr. Glinert,
the Group’s current Chairman), one of the founding groups of Sarine. While
on Wall Street, he worked as a research analyst at Wertheim Schroder &
Co., covering media and entertainment companies. Mr. Kessler holds a
Bachelor’s degree (magna cum laude) in Economics and Mathematics from
Yeshiva University and an MBA from Columbia University, both in NY, USA.
May 28, 2021 16
Sarine Technologies
Abraham Meir Kerner is the Group’s VP of R&D since 2009 and was its Chief Technological Officer since 2004. He is primarily responsible for developing our technological base, as well as overseeing the development of new products. Prior to 2004, Mr. Kerner was the R&D manager for nearly a decade, having joined Sarine in 1995. Prior to joining the Group, Mr. Kerner worked for companies related to the Group, where he accumulated 15 years of engineering experience and was involved for ten of those years in the development of precision motion control systems and accurate measuring machines for diamonds. Between 1989 and 1995 Mr. Kerner worked for Shalev (founded by Mr. Levami, the Group’s non-executive director) and then Interhightech (founded by Mr. Glinert, the Group’s current Chairman, into which Shalev was merged in 1993) on the original DiaMension® and the DiaCenter™, the first automated computerised centering system for rough diamonds for bruting. From 1986 through 1989 while at Shalev, Mr. Kerner participated in the Group’s original development project – the Robogem™, an automated system for planning and shaping non-diamond gemstones. Before that, from 1980 through 1986 Mr. Kerner worked for another of Mr. Levami’s start-ups – Compulite. Mr. Kerner holds a Bachelor’s degree in Electrical Engineering from the Technion - Israel Institute of Technology.
Oren Ben-Kohav joined Sarine in 2017 as the Group’s VP for Global Operations. He is responsible for Sarine's procurement, production, customer care, Information Technology (IT), including the Management Information Systems (MIS), and the operation of Sarine’s global service centres. In this role, Oren is focusing on improving and optimising the services the Group provides its customers, along with implementing customer-centric paradigms. Prior to joining Sarine, from 2010 through 2017, Oren served as the Executive Director of Customer Operations and the Israeli branch COO for McKesson (Nasdaq:MCK), supporting McKesson’s customer services for its digital imaging and diagnostic solutions, used by cardiologists and IT professionals working for hundreds of healthcare providers and imaging centres worldwide. From 2002 to 2010 he served as a Director of Product Operations at Medcon, an Israeli healthcare IT company, responsible for customer support and implementation teams, providing services globally to their customers and resellers. From 1999 to 2002 Oren led the project management and information services groups in Gamatronic, a publicly traded Israeli company (TASE:GAMT) and was responsible for executing large scale projects for governmental customers, both military and civilian. Mr Ben-Kohav holds a Bachelor’s degree in Business Management, with specialisation in information systems, from Touro College in New York. Tzafrir Yehuda Engelhard has been the Group’s VP of Business development since 2017, responsible for development of new business lines and strategic cooperation with other parties. Tzafrir earlier served as the Group’s Vice President of Business Development Polished Diamonds Trade from 2013 through 2016, and the Director of Business Development since 2010. During 2009, Mr. Engelhard was the CEO of Sarin India in charge of the overall management of the operations and business in India, and, specifically, the launch of Sarine’s first Galaxy® inclusion mapping service centre there. Prior to that, Mr. Engelhard served as a Product Manager, responsible for several of the Group’s products. Prior to joining Sarine, from 2007 to 2008, Mr. Engelhard worked at eTouchware, a software company that provides solutions for secure and efficient file transfers over the Internet, and, from 2004 to 2007, at Cognitens (later purchased by Hexagon Metrology), a company that developed and sold high precision noncontact measurement devices to the worldwide automotive market. Mr. Engelhard holds an MBA from the Hebrew University of Jerusalem, with specialisation in marketing strategy, and a Bachelor’s degree in Optomechanics Engineering from the Technion – Israel Institute of Technology.
May 28, 2021 17
Key Metrics
P/BV (x) 1.6 1.8 2.4 2.2 2.1
P/NTA (x) 1.6 1.8 2.4 2.2 2.1
Net dividend yield (%) 2.9 1.6 3.3 4.4 5.5
FCF yield (%) 4.2 nm 8.4 6.4 9.4
EV/EBITDA (x) 13.5 10.6 7.9 6.5 5.5
EV/EBIT (x) 67.2 19.6 10.4 8.1 6.6
INCOME STATEMENT (USD m)
Net interest income /(exp) (0.7) (0.8) (0.8) (0.9) (1.0)
Associates & JV 0.0 0.0 0.0 0.0 0.0
Exceptionals 0.0 0.0 0.0 0.0 0.0
Other pretax income 0.0 0.0 0.0 0.0 0.0
Pretax profit 0.4 4.0 12.1 15.2 18.2
Income tax (1.8) (1.6) (1.9) (2.6) (3.3)
Minorities 0.0 0.0 0.0 0.0 0.0
Discontinued operations 0.0 0.0 0.0 0.0 0.0
Reported net profit (1.4) 2.4 10.2 12.6 14.9
Core net profit (1.4) 2.4 10.2 12.6 14.9
BALANCE SHEET (USD m)
Accounts receivable 14.6 22.0 18.7 20.2 21.7
Inventory 5.5 6.2 7.0 8.0 9.0
Property, Plant & Equip (net) 13.5 12.3 11.8 11.7 12.2
Intangible assets 3.6 2.6 2.6 2.6 2.6
Investment in Associates & JVs 0.0 0.0 0.0 0.0 0.0
Other assets 10.5 9.3 9.3 9.3 9.3
Total assets 77.1 79.9 85.0 90.8 97.1
ST interest bearing debt 1.3 1.3 1.3 1.3 1.3
Accounts payable 3.9 1.9 2.1 2.2 2.3
LT interest bearing debt 5.7 8.5 8.5 8.5 8.5
Other liabilities 7.0 8.0 8.0 8.0 8.0
Total Liabilities 17.7 19.2 19.4 19.5 19.6
Shareholders Equity 59.4 60.7 65.6 71.3 77.4
Minority Interest 0.0 0.0 0.0 0.0 0.0
Total shareholder equity 59.4 60.7 65.6 71.3 77.4
Total liabilities and equity 77.1 79.9 85.0 90.8 97.1
CASH FLOW (USD m)
Adj net interest (income)/exp 0.0 0.0 0.0 0.0 1.0
Change in working capital 5.5 (10.2) 2.8 (2.4) (2.3)
Cash taxes paid (3.1) (0.6) (2.0) (2.6) (3.3)
Other operating cash flow 0.0 0.0 0.0 0.0 2.0
Cash flow from operations 7.3 (2.9) 16.9 14.2 19.6
Capex (3.2) (2.8) (3.5) (4.0) (4.5)
Free cash flow 4.0 (5.7) 13.4 10.2 15.1
Dividends paid (5.3) (1.0) (5.2) (7.0) (8.7)
Equity raised / (purchased) 0.0 (0.1) 0.0 0.0 0.0
Perpetual securities 0.0 0.0 0.0 0.0 1.0
Change in Debt 0.0 3.4 3.4 0.0 0.0
Other invest/financing cash flow 1.8 5.9 0.0 0.0 1.0
Effect of exch rate changes 0.0 0.0 0.0 0.0 0.0
Net cash flow 0.6 2.5 11.6 3.2 8.3
May 28, 2021 18
Key Ratios
Growth ratios (%)
Reported net profit growth nm nm 330.2 24.3 17.8
Core net profit growth nm nm 330.2 24.3 17.8
Profitability ratios (%)
Pretax profit margin 0.9 9.8 22.0 23.6 25.7
Payout ratio nm 74.0 51.6 55.3 58.7
DuPont analysis
Revenue/Assets (x) 0.7 0.5 0.6 0.7 0.7
Assets/Equity (x) 1.3 1.3 1.3 1.3 1.3
ROAE (%) (2.2) 3.9 16.1 18.5 20.0
ROAA (%) (1.8) 3.0 12.3 14.4 15.9
Liquidity & Efficiency
Leverage & Expense Analysis
Asset/Liability (x) 4.4 4.2 4.4 4.7 4.9
Net gearing (%) (incl perps) net cash net cash net cash net cash net cash
Net gearing (%) (excl. perps) net cash net cash net cash net cash net cash
Net interest cover (x) 1.7 6.3 16.1 17.9 19.2
Debt/EBITDA (x) 1.3 1.1 0.6 0.5 0.4
Capex/revenue (%) 6.3 6.9 6.4 6.2 6.4
Net debt/ (net cash) (22.4) (17.8) (25.9) (29.2) (32.5)
Source: Company; Maybank
Suhaimi ILIAS Chief Economist Malaysia | Philippines | Global (603) 2297 8682 suhaimi_ilias@maybank-ib.com
CHUA Hak Bin Regional Thematic Macroeconomist (65) 6231 5830 chuahb@maybank.com
LEE Ju Ye Singapore | Thailand | Indonesia (65) 6231 5844 leejuye@maybank.com
Linda LIU Singapore | Vietnam | Cambodia | Myanmar | Laos (65) 6231 5847 lindaliu@maybank.com
Dr Zamros DZULKAFLI (603) 2082 6818 zamros.d@maybank-ib.com
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FX
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Christopher WONG (65) 6320 1347 wongkl@maybank.com.sg
TAN Yanxi (65) 6320 1378 tanyx@maybank.com.sg
Fiona LIM (65) 6320 1374 fionalim@maybank.com.sg
STRATEGY
FIXED INCOME
SE THO Mun Yi (603) 2074 7606 munyi.st@maybank-ib.com
REGIONAL EQUITIES
Anand PATHMAKANTHAN Head of Regional Equity Research (603) 2297 8783 anand.pathmakanthan@maybank-ib.com
WONG Chew Hann, CA Head of ASEAN Equity Research (603) 2297 8686 wchewh@maybank-ib.com
ONG Seng Yeow Research, Technology & Innovation (65) 6231 5839 ongsengyeow@maybank.com
MALAYSIA
desmond.chng@maybank-ib.com • Banking & Finance
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WONG Wei Sum, CFA (603) 2297 8679 weisum@maybank-ib.com • Property
LEE Yen Ling (603) 2297 8691 lee.yl@maybank-ib.com • Glove • Ports • Shipping • Healthcare • Petrochemicals
Kevin WONG (603) 2082 6824 kevin.wong@maybank-ib.com • REITs • Technology
Jade TAM (603) 2297 8687 jade.tam@maybank-ib.com • Consumer Staples & Discretionary
Fahmi FARID (603) 2297 8676 fahmi.farid@maybank-ib.com • Software
TEE Sze Chiah Head of Retail Research (603) 2082 6858 szechiah.t@maybank-ib.com
Nik Ihsan RAJA ABDULLAH, MSTA, CFTe (603) 2297 8694 nikmohdihsan.ra@maybank-ib.com • Chartist
Amirah AZMI (603) 2082 8769 amirah.azmi@maybank-ib.com • Retail Research
SINGAPORE
LAI Gene Lih, CFA (65) 6231 5832 laigenelih@maybank.com • Technology • Healthcare
Kareen CHAN (65) 6231 5926 kareenchan@maybank.com • Transport • Telcos • Consumer
Eric ONG (65) 6231 5924 ericong@maybank.com • SMIDs
Matthew SHIM (65) 6231 5929 matthewshim@maybank.com
• Retail Research
PHILIPPINES
Jacqui De JESUS Head of Research (63) 2 8849 8844 jacqui.dejesus@maybank.com • Strategy • Conglomerates
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VIETNAM
Quan Trong Thanh Head of Research (84 28) 44 555 888 ext 8184 thanh.quan@maybank-kimeng.com.vn • Banks
Hoang Huy, CFA (84 28) 44 555 888 ext 8181 hoanghuy@maybank-kimeng.com.vn • Strategy • Technology
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Neerav DALAL (91) 22 4223 2606 neerav@maybank.com • Software Technology • Telcos
Kshitiz PRASAD (91) 22 4223 2607 kshitiz@maybank.com • Banks
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INDONESIA
• Autos • Consumer • Utility
Willy GOUTAMA (62) 21 8066 8500 willy.goutama@maybank-ke.co.id • Consumer
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Maria LAPIZ Head of Institutional Research Dir (66) 2257 0250 | (66) 2658 6300 ext 1399 Maria.L@maybank-ke.co.th • Strategy • Consumer • Materials • Services
Jesada TECHAHUSDIN, CFA (66) 2658 6300 ext 1395 jesada.t@maybank-ke.co.th • Banking & Finance
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Vanida GEISLER, CPA (66) 2658 6300 ext 1394 Vanida.G@maybank-ke.co.th • Property • REITs
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Jaroonpan WATTANAWONG (66) 2658 5000 ext 1404
jaroonpan.w@maybank-ke.co.th • Transportation • Small cap
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Theerasate PROMPONG (66) 2658 5000 ext 1400 theerasate.p@maybank-ke.co.th • Equity Portfolio Strategist
Apiwat TAVESIRIVATE (66) 2658 5000 ext 1310 apiwat.t@maybank-ke.co.th • Chartist and TFEX
May 28, 2021 20
APPENDIX I: TERMS FOR PROVISION OF REPORT, DISCLAIMERS AND DISCLOSURES
DISCLAIMERS This research report is prepared for general circulation and for information purposes only and under no circumstances should it be considered or intended as an offer to sell or a solicitation of an offer to buy the securities referred to herein. Investors should note that values of such securities, if any, may fluctuate and that each security’s price or value may rise or fall. Opinions or recommendations contained herein are in form of technical ratings and fundamental ratings. Technical ratings may differ fr om fundamental ratings as technical valuations apply different methodologies and are purely based on price and volume-related information extracted from the relevant jurisdiction’s stock exchange in the equity analysis. Accordingly, investors’ returns may be less than the original sum invested. Past performance is not necessarily a guide to future performance. This report is not intended to provide personal investment advice and does not take into account the specific investment objectives, the financial situation and the particular needs of persons who may receive or read this report. Investors should therefore seek financial, legal and other advice regarding the appropriateness of investing in any securities or the investment strategies discussed or recommended in this report.
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May 28, 2021 21
Disclosure of Interest
Malaysia: MKE and its Representatives may from time to time have positions or be materially interested in the securities referred to herein and may further act as market maker or may have assumed an underwriting commitment or deal with such securities and may also perform or seek to perform investment banking se rvices, advisory and other services for or relating to those companies. Singapore: As of 28 May 2021, Maybank KERPL and the covering analyst do not have any interest in any companies recommended in this research report. Thailand: MBKET may have a business relationship with or may possibly be an issuer of derivative warrants on the securities /companies mentioned in the research report. Therefore, Investors should exercise their own judgment before making any investment decisions. MBKET, its associates, directors, connected parties and/or employees may from time to time have interests and/or underwriting commitments in the securities mentioned in this report. Hong Kong: As of 28 May 2021, KESHK and the authoring analyst do not have any interest in any companies recommended in this research report. India: As of 28 May 2021, and at the end of the month immediately preceding the date of publication of the research report, KESI, authoring analyst or their associate / relative does not hold any financial interest or any actual or beneficial ownership in any shares or having any conflict of interest in the subject companies except as o therwise disclosed in the research report.
In the past twelve months KESI and authoring analyst or their associate did not receive any compensation or other benefits from the subject companies or third party in connection with the research report on any account what so ever except as otherwise disclosed in the research report.
MKE may have, within the last three years, served as manager or co-manager of a public offering of securities for, or currently may make a primary market in issues of, any or all of the entities mentioned in this report or may be providing, or have provided within the previous 12 months, significant advice or investment services in relation to the investment concerned or a related investment and may receive compensation for the services provided from the companies covered in this report.
OTHERS
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The views expressed in this research report accurately reflect the analyst’s personal views about any and all of the subject securities or issuers; and no part of the research analyst’s compensation was, is or will be, directly or indirectly, related to the specific recommendations or views expressed in the report.
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Maybank Kim Eng Research uses the following rating system
BUY Return is expected to be above 10% in the next 12 months (including dividends)
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Applicability of Ratings
The respective analyst maintains a coverage universe of stocks, the list of which may be adjusted according to needs. Investment ratings are only applicable to the stocks which form part of the coverage universe. Reports on companies which are not part of the coverage do not carry investment ratings as we do not actively follow developments in these companies.
UK This document is being distributed by Maybank Kim Eng Securities (London) Ltd (“Maybank KESL”) which is authorized and regulated, by the Financial Conduct Authority and is for Informational Purposes only. This document is not intended for distribution to anyone defined as a Retail Client under the Financial Services and Markets Act 2000 within the UK. Any inclusion of a third party link is for the recipients convenience only, and that the firm does not take any responsibility for its comments or accuracy, and that access to such links is at the individuals own risk. Nothing in this report should be considered as constituting legal, accounting or tax advice, and that for accurate guidance recipients should consult with their own independent tax advisers.
DISCLOSURES
Legal Entities Disclosures Malaysia: This report is issued and distributed in Malaysia by Maybank Investment Bank Berhad (15938- H) which is a Participating Organization of Bursa Malaysia Berhad and a holder of Capital Markets and Services License issued by the Securities Commission in Malaysia. Singapore: This report is distributed in Singapore by Maybank KERPL (Co. Reg No 198700034E) which is regulated by the Monetary Authority of Singapore. Indonesia: PT Maybank Kim Eng Securities (“PTMKES”) (Reg. No. KEP-251/PM/1992) is a member of the Indonesia Stock Exchange and is regulated by the Financial Services Authority (Indonesia). Thailand: MBKET (Reg. No.0107545000314) is a member of the Stock Exchange of Thailand and is regulated by the Ministry of Finance and the Securities and Exchange Commission. Philippines: Maybank ATRKES (Reg. No.01-2004-00019) is a member of the Philippines Stock Exchange and is regulated by the Securities and Exchange Commission. Vietnam: Maybank Kim Eng Securities Limited (License Number: 117/GP-UBCK) is licensed under the State Securities Commission of Vietnam. Hong Kong: KESHK (Central Entity No AAD284) is regulated by the Securities and Futures Commission. India: Kim Eng Securities India Private Limited (“KESI”) is a participant of the National Stock Exchange of India Limited and the Bombay Stock Exchange and is regulated by Securities and Exchange Board of India (“SEBI”) (Reg. No. INZ000010538). KESI is also registered with SEBI as Category 1 Merchant Banker (Reg. No. INM 000011708) and as Research Analyst (Reg No: INH000000057) US: Maybank KESUSA is a member of/ and is authorized and regulated by the FINRA – Broker ID 27861. UK: Maybank KESL (Reg No 2377538) is authorized and regulated by the Financial Conduct Authority.
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