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Sarine Technologies is an Israeli company listed on the SGX that develops and sells precision technology products primarily for
the diamond industry. Management is experienced and competent, as can be seen from Sarines attractive ROIC sustained over
many years at >10% (usually much higher), even during downturns.

The share price has dropped almost 40% from its recent high in May 2017 to SGD 1.19 as a result of weakness in the polished
diamond market, plus Sarines loss of market share to competitors infringing on its intellectual property. We view this as a
temporary setback, but also recognize that the cyclical nature of the diamond industry, coupled with the limited leverage that
Sarines customers can exert over suppliers and retailers, demand a discount to the companys valuation. As such, we think that
SGD 0.90 or lower is a fairer level to initiate a small position at duing this cyclical downswing. At this price, Sarine will be trading
at 12x its FY2016 earnings.

Re-rating catalysts include further penetration of the diamond grading and certification market, better pricing for the Sarine
Profile, and clearer signs that lab-grown diamonds will occupy its own niche in the jewellery market rather than substituting and
devaluing natural diamonds.

The Business

Sarines products serve the midstream and trade segments of the diamond industry value chain. Players in the midstream are
the customers of the diamond miners, from which they purchase rough diamonds that are cut, polished and set into the final
jewellery pieces. Because the barriers of entry are low, the midstream is highly fragmented, comprising approximately 5,000
companies that are predominantly family-run. This contrasts with the upstream segment, which is far more consolidated. Just 6
entities - De Beers, Al Rosa, the Government of Botswana, Dominion Diamonds, Rio Tinto and the Government of Angola -
control an estimated 78% of the worlds rough diamond supply, giving them significant pricing power. On top of that, the
polished diamonds that the midstream produces are sold at prices that fluctuate with demand. As a result, midstream players
are price takers at both ends and typically have very low single-digit operating profit margins.

Under this backdrop, many of Sarines products are important to the midstream because they help maximize yields and hence
profits. The DiaExpert platforms and Galaxy inclusion mapping systems, for instance, are used to plan the optimal utilization of
rough diamonds by trading off 3 of the 4 Cs - Carat, Cut and Clarity, raising the optimally achievable yield of polished stone
weight from 40% to 50% of the weight of the rough stone, a 25% increase. The rough diamonds can then be marked and cut
with Sarines Quazer laser systems.

The characteristics of polished diamonds can be graded using Sarines products, too. Cut and Symmetry grades can be derived
using the DiaMension, and the light performance measured with the Sarine Light. Most recently, in Q3 2017 Sarine introduced
automated systems for evaluating a diamonds Clarity and Colour, completing their portfolio for 4Cs grading. In addition, should
potential buyers desire to personally assess a diamonds beauty and internal features without being physically present, the
Sarine Loupe imaging system offers a 3D view at up to 40x magnification over the full 360 degrees. The output of these
technologies are combined in the Sarine Profile, a digital sales tool that allows diamond wholesalers and retailers to
show-and-tell polished diamonds in a personalized manner, thereby enhancing the buying experience.

55% of Sarines FY2016 revenue came from its inclusion mapping products, 35% from its diamond planning and grading products,
5% from fees for maintenance and spare parts, 3% from its Quazer laser systems, and 2% from the Sarine Profile. Generally,
customers pay one-time upfront costs for the equipment and ongoing per-use fees based on the carat of the diamonds scanned.
The result is a win-win situation for both Sarine and its clients. The smaller upfront costs are more affordable and allow the
midstream businesses to spread out their capital requirements, while Sarine benefits from having more recurring revenue,
which makes sales figures more predictable by smoothing out the effects of market volatility. In FY2016, the recurring portion of
Sarines revenue made up 40% of its total.

Why invest?

Sarine invests between 10-20% of revenues into R&D every year, which has paid off - the company has a good track record of
developing products that are relevant to and widely adopted by their target market. Many of their product lines occupy
market-leading positions in their respective segments. The DiaExpert is the de-facto worldwide standard for rough diamond
planning, the Galaxy systems dominate the inclusion mapping market, and the DiaMension is used to measure polished diamond
proportions in all major gemological labs globally. Overall, Sarines diamond planning and grading products have a combined
market share of 70+%.

Sarine has historically earned excellent returns on invested capital. ROIC was 53.6% on average over the past 5 years,
supported by high net profit margins of typically >20%. Profits are eked out even in lean years - the company has not had a loss
over at least 16 consecutive years. During the cyclical downturns of 2009 and 2015, profit margins slipped to <10% but ROIC
remained a respectable 13.9% and 10.6%, respectively. This is impressive considering how sparingly Sarine uses leverage - the
last time Sarine had any short- or long-term loans on its books was way back in 2001. As a result, the balance sheet is strong,
with the company in a net cash position of USD 24.5 million and having zero bank borrowings.

Sarine is able to maintain a consistently strong balance sheet because its business generates ample free cash flows that are
roughly in line with net profits. Its cash holdings give Sarine the option of acquiring new companies and technologies when
opportunities arise, such as in 2008 when it bought out Galatea, the company that produced the original Galaxy systems. In FY
2016, the Galaxy inclusion mapping systems contributed 55% of sales, or nearly USD 40 million. Assuming an average profit
margin of 20%, net profits from Galaxy family of products was USD 8 million last year alone. So the purchase consideration of
just under USD 11 million has probably since paid for itself several times over - another sign of managements astuteness.
Likewise, Sarine acquired light performance technology from Overseas Diamond Technologies NV for USD 650k in 2010, and
imaging technology from DSee Imaging for USD 750k in 2011. These were later launched as the Sarine Light and Sarine Loupe.
When excess cash is not needed, much of it is returned to shareholders per the companys dividend policy of distributing USD 2
cents every 6 months. Since 2011, approximately 80% of free cash flows have been distributed as dividends.

As the midstream businesses that form the bulk of Sarines customer base suffer from poor profitability, Sarine has increasingly
turned to the downstream trade segment for diversification and growth. Although the downstream market is also fragmented,
with an estimated 200,000 retail players, the size of the pie is much larger at USD 74-80 billion. This is because the jewellery
manufacturing and retail stages are where the greatest value (USD 45-50 billion) is added along the diamond value chain from
mine to store, compared to the cutting and polishing stages which add only about USD 5 billion. Hence, downstream businesses
are far more profitable than their counterparts in the midstream, commanding profit margins of 10-14%. They are therefore
better able to spend on Sarines products and services.

The 4Cs grading market that Sarine is addressing with its DiaMension, Clarity and Color solutions, for instance, currently
generates about 7 million reports worth about USD 500 million annually. Certification is a highly profitable business, since
capital costs for setting up a laboratory is only around USD 1.5 million, while prices for reports range from USD 50-100 per carat.
Sarines options here include cooperating with existing gemological labs, supporting self-certification by major manufacturers or
leading retailers, and setting up its own certification laboratories. We think that the first 2 options are more appealing because
they avoid competing with and potentially alienating existing laboratories that are also Sarines customers, but also note that
the capital outlay for establishing its own laboratories is well within Sarines capabilities.

As for the Sarine Profile, adoption among retailers has so far been below expectations. First launched in 1Q 2015, 2.5 years later
the Profile still accounts for only 2% of sales. However, momentum appears to be picking up, particularly in the Asia Pacific
region where several upmarket retailers have started sales programs utilizing the Sarine Profile. We also agree with
managements views that planned enhancements to the Sarine Profile, such as the addition of support for jewellery pieces and
the potential integration of the new Sarine Clarity and Sarine Color (whether at the retail or lab level), will significantly broaden
its appeal.

Moreover, after a long period of stagnation the diamond industry has finally begun to increase marketing efforts to bolster
demand for diamonds. The Diamond Producers Association, formed in 2015 by 7 leading diamond miners, announced in June a
full-year marketing investment of USD 57 million, more than 4x the previous years budget. De Beers has also increased its
marketing budget to USD 140 million, the highest level since 2008. This should help support polished diamond prices, relieving
the pressure on the midstream manufacturers.

Finally, although Sarines 1H 2017 results were lacklustre, we believe that this recent underperformance may be temporary,
down to the weak market environment and illicit competition in India, which led to the company taking on additional legal fees
in order to protect its intellectual property rights.



The diamond cutting and polishing industry is inherently cyclical, subject as it is to the whims of the diamond miners in setting
rough prices and the vagaries of consumer demand for polished diamonds, both of which are outside the midstreams control.
Higher rough pricing or lower polished prices can erode margins to nothing and increase the need for bank financing, raising the
risk of business failure among the midstream players. This is what happened in 2015, and is also happening now, as polished
diamond prices have dropped 18% from their 2014 peak, a trend that shows no signs of abating.

The lack of significant recent discoveries of kimberlite, coupled with the adverse technical and financing challenges of new mines
under development, means that global rough diamond supply will come under strain in the near future. Bain & Company, a
consultancy that publishes an annual report on the global diamond industry, expects the production of rough diamonds to peak
in 2019 at 169 million carats, and to decline at a rate of 1.9% annually thereafter before levelling off at 153 million carats in 2023.
While this reduction in supply may lead to higher market value by way of higher prices, any volume decline is likely bad news for
Sarine, which derives an increasingly large proportion of its revenues from fees charged per stone scanned on a per carat basis
(such recurring revenues accounted for 42% of sales in H1 2017).

If lower supply of rough diamonds leads to increased prices, diamond cutters and polishers will be further squeezed in the
absence of greater support for the midstream, market consolidation to increase their collective bargaining power or heightened
demand and pricing for polished diamonds to increase the spread between rough and polished stones. Although Sarines
customers in the midstream segment are typically the larger players (the company saw limited negative impact from Indias
demonetization in Nov 2016), any additional pressure on already thin margins will force these companies to cut capital spending,
including on Sarines products.

Another factor that gives us pause is the fact that Sarine has been paying out the vast majority of its FCFs in recent years,
indicating that there is a dearth of attractive reinvestment opportunities to justify retaining the capital. For instance, Sarine has
mentioned that it is looking into developing solutions to aid the authentication of polished diamonds (natural vs synthetic,
untreated vs treated). But there are already several companies in this space, including the diamond mining major De Beers,
which has much greater financial muscle than Sarine. Likewise, the Allegro, Sarines solution for coloured gemstone planning,
has not gained traction and its commercial potential remains uncertain.

Further, the immediate addressable market for the Sarine Profile is on the small side, because only 30% of mined diamonds
are gem-quality, and an even smaller proportion is of high enough quality to be worth branding. In all, there are approximately
500,000 brand name stones averaging 0.7 carats each. Sarine charges USD 35 per carat for the use of the Sarine Profile, so the
total market size is only about USD 12 million. Even in the unlikely scenario that Sarine captures the entire market, this will not
move the needle much unless Sarine is able to significantly increase pricing.

The rise of lab-grown diamonds is another wild card. At 2-3 million carats, they account for only 2-3% of gem-quality diamond
production at present, but we will consider 2 extreme future scenarios based on interesting proxies to the lab-grown diamond

Scenario A: Minimal impact, as is the case for the precious gem market. Man-made, high-quality sapphires, rubies and emeralds
have been available for over 100 years and the market for man-made gemstones is now larger than its natural equivalent, since
the gemstones have been accepted by the downstream jewellery industry. Yet this has not dampened the demand for natural
stones and there remains a favourable premium for natural gemstones over their man-made counterparts. Natural sapphires,
for instance, are still mined at about the same rate as natural diamonds, and the price of natural sapphires has still grown over
the past 35 years.

Scenario B: Substitution and devaluation, as is the case for the natural pearl market. Natural pearls used to be very rare and
expensive - the Cartier building on 5th Avenue was exchanged for a double-strand of natural pearls worth $1 million back in 1917.
However, cultured Japanese Akoya pearls soon made natural pearls obsolete, since pearl farming was far easier and more
lucrative. As a result, 40 years later in 1957 the same double-stranded natural pearl necklace fetched just $150,000 in an auction,
a loss of 85% of its original nominal value. Worse, the Japanese pearls eventually had to face competition from non-nucleated
freshwater pearls from China, which were even cheaper, starting from the 1970s.

We think that Scenario A is the likelier of the two given that the market for diamonds is still driven by bridal, for which there is a
discriminatory desire for natural stones. There is also now a concerted effort by the diamond miners to market and differentiate
natural diamonds from lab-grown ones, which should help reduce the likelihood of substitution. Moreover, even if Scenario B
comes to pass, lab-grown diamonds still need to be cut and polished, and can also be graded. Even if the existing gemological
labs refuse to grade lab-grown diamonds, Sarine has the ability to create this market by setting up its own laboratories that use
its own technologies (Sarine Colour, Sarine Clarity, the DiaMension, and Sarine Light) to grade the stones. However, since
lab-grown diamonds tend to be cleaner and there is no limit to the amount of diamond that can be grown, inclusion mapping
will not be necessary - this will have an enormous impact on Sarine in the substitution scenario, as Sarine currently derives 55%
of sales from inclusion mapping products and services.



All of Sarines key management personnel, save the CFO, have technical backgrounds in Computer Science or Engineering, in
addition to decades of experience in the diamond industry.

Key Management Role Education

David Sydney Block Chief Executive Officer Bachelors in Computer Science, MBA
William Kessler Chief Financial Officer Bachelors in Economics and Mathematics, MBA
Abraham Meir Kerner Vice President of Research & Development Bachelors in Electrical Engineering
Ron Ben-Ari Vice President of Product Management Bachelors in Computer Science, MBA
Tzafrir Yehuda Engelhard Vice President of Business Development Bachelors in Optomechanics Engineering, MBA
Yosef Vax Vice President of Operations Electronics Practical Engineer

Managements remuneration is primarily fixed and in cash. Share options are granted yearly based on performance and time of
service. Under the terms of the 2015 share options plan, options vest over 1- to 4-year periods, subject to service and
performance-based conditions, and expire after 6 years. Further, the aggregate number of ordinary shares which may be
granted as options cannot exceed 15% of the issued share capital of the company, limiting the potential for dilution.

Key Management Fixed Income Cash Performance Based Incentives Options (Non-cash, based on fair value)
David Sydney Block 64% 14% 22%
William Kessler 67% 14% 19%
Abraham Meir Kerner 81% 9% 10%
Ron Ben-Ari 82% 4% 14%
Tzafrir Yehuda Engelhard 80% - 20%

The Board of Directors includes Chairman Daniel Benjamin Glinert and Executive Director and ex-CEO Uzi Levami, 2 of the
original founders of Sarine.

Remuneration Fixed Cash Performance Options (Non-cash,

Board of Directors Role
(2016) Income Based Incentives based on fair value)
Daniel Benjamin Glinert Chairman S$ 522,000 39% 33% 28%
Uzi Levami Executive Director S$ 840,000 47% 22% 31%
Eyal Mashiah* Executive Director S$ 369,000 40% 27% 33%
Yehezkel Pinhas Blum Independent Director S$ 155,000 46% - 54%
Chan Kam Loon Independent Director S$ 143,000 41% - 59%
Valerie Ong Choo Lin Independent Director S$ 143,000 41% - 59%
Avraham Eshed Non-executive Director S$ 9,000 71% - 29%
Ehud Harel* Non-executive Director S$ 8,000 100% - -
Hanoh Stark* Non-executive Director S$ 8,000 100% - -

* Eyal Mashiah, Ehud Harel and Hanoh Stark stepped down from the Board of Directors in 2017. A new director, Varda Shine,
who has >30 years experience with De Beers, has been appointed, and the Board is considering the addition of 2 more directors
in future, preferably individuals from the retail polished diamond trade industry.
Image: Sarines product portfolio


Image: Rough diamond supply market shares by value, 2014

Image: Average operating profit margins by diamond value chain segment, 2013-2016


Table: Income statement, 2007-2016

Thousands of USD 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
Revenue 37,123 33,149 21,382 45,663 57,803 63,750 76,369 87,770 48,453 72,524
- Sale of products 36,074 31,559 18,614 39,668 48,823 53,973 63,558 72,946 36,605 60,596
- Maintenance and services 1,049 1,590 2,768 5,995 8,980 9,777 12,811 14,824 11,848 11,928
Gross profit 24,402 21,130 12,479 29,350 38,281 43,388 54,583 61,903 32,549 50,289
Research and development costs (4,281) (5,458) (3,422) (5,246) (5,771) (6,180) (8,370) (10,616) (10,564) (10,844)
Selling and marketing expenses (6,869) (7,152) (4,502) (6,369) (7,401) (8,788) (11,047) (12,610) (12,557) (13,578)
General and administrative expenses (3,299) (4,135) (2,404) (3,305) (3,853) (3,961) (5,368) (5,730) (3,929) (4,657)
Other income / (expenses) 0 0 0 0 0 0 0 0 0 0
Profit from operations 9,953 4,385 2,151 14,430 21,256 24,459 29,798 32,947 5,499 14,932
Net finance income / (expenses) 563 1,094 181 (18) 178 61 17 (207) (197) 755
Share of results of equity-accounted
investee 0 (2,196) (728) (563) 0 0 0 0 0 0
Profit before tax 10,516 3,283 1,604 13,849 21,434 24,520 29,815 32,740 5,302 21,965
Net profit for the year 8,010 1,594 1,528 11,111 17,366 20,755 23,888 27,230 3,587 17,980
Table: Return on invested capital, 2007-2016

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
Net operating profit after tax (NOPAT) 7,465 3,289 1,613 10,823 15,942 18,344 22,349 24,710 4,124 11,199
Cash and cash equivalents 15,188 9,910 12,151 22,857 14,356 19,155 20,011 20,352 19,298 19,467
Short-term investments (bank deposits) 1,443 2,100 8,712 5,413 19,105 17,147 13,048 25,145 13,298 18,520
Short-tern loans 0 0 0 0 0 0 0 0 0 0
Long-term loans 0 0 0 0 0 0 0 0 0 0
Total equity 29,148 30,451 32,471 38,885 48,203 56,138 67,334 79,631 71,531 79,313
Invested capital 9,469 5,297 3,622 12,833 17,953 20,356 24,362 26,724 6,139 13,215
ROIC 59.6% 17.8% 13.9% 102.0% 108.1% 92.5% 65.2% 72.4% 10.6% 27.1%

Table: Free cash flow, 2007-2016

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
Cash flows generated from
operating activities 10,764 1,648 9,654 14,447 17,103 23,218 19,631 34,283 6,487 22,191
Net purchase of PPE (1,408) (1,717) (1,241) (1,714) (1,535) (4,210) (7,292) (3,144) (3,497) (4,337)
Interest received 853 603 345 211 (354) 451 293 370 210 244
Interest paid (121) (153) (114) (131) 615 (376) (343) (326) (390) 0
Free cash flow 9,356 (69) 8,413 12,733 15,568 19,008 12,339 31,139 2,990 17,854
Cash available for dividends 10,088 381 8,644 12,813 15,829 19,083 12,289 31,183 2,810 18,098
Dividends paid 6,206 2,101 0 5,445 8,075 13,690 18,079 17,398 12,216 12,248
Dividend payout ratio 61.5% 551.4% 0.0% 42.5% 51.0% 71.7% 147.1% 55.8% 434.7% 67.7%

Image: Value added in each stage of the diamond value chain, 2013

Image: Rough diamond supply forecast by Bain & Company, 2016-2030


Image: Mercury Diamond Global Tracker of polished prices, 2009-2017

Image: Technologies for lab-grown diamond detection, 2014


Image: Production of man-made stones does not have to adversely affect market for natural stones

Image: Prices of natural sapphires have grown over the decades despite the prevalence and low price of
man-made sapphires


Table: Sarines competitors

Inclusion Mapping Rough Planning 4Cs Grading Light Performance Grading

Sarine: Sarine DiaMension,
Sarine: Galaxy systems Sarine: DiaExpert systems Sarine: Sarine Light
Sarine Color, Sarine Clarity
Octonus: Helium Rough OGI: FireTrace, CFire
Octonus: Immersion Glass GIA: Facetware
High-end, specialises in Measure brightness /
High-end, better yield of up Estimates cut grade for round
optimization of colour brilliance, fire and
to 75%, but more expensive brilliant cut diamonds
saturation scintillation
Sahajanad Laser Technology:
Sahajanad Laser Technology: AGS: ASET, Idealscope
Lotus and Airwin Covian OGI: Scanox Proportion,
Nebula and Comet systems Have to know how to
Low-end equipment with DiamScope, DiaColor, Spectra
Not commercially successful Interpret the images
minimal market presence
OGI: Scanox Tender, ImaGem: Grader GL 3200,
OGI: ClearEX ImaGem: VeriGem
Scanox Planner Clarity GL 5200
GemEx: BrillianceScope

3D Imaging 360 Photography / Video Digital Sales Tool

Sarine: Sarine Loupe Sarine: No product yet Sarine: Sarine Profile
A Royal Co.: Vision360
Diamond Digital Passport
GemEx: GemEx Live Report
360 Photography Studio
Faltz Group: Diamond360
OGI: DiaPix
Octonus: DiBox, ViBox
Table: Share buybacks and changes in substantial shareholders interests

Individual / Entity Role Date Type Number Amount Price

Daniel Benjamin Glinert Chairman 1 Mar 2016 BUY 80,000 $ 121,240 $ 1.52
Uzi Levami CEO 1 Mar 2016 EXERCISE 100,000 $ 139,500 $ 1.40
FIL Limited* Substantial Shareholder 2 Jun 2016 SELL 3,350,750 $ 5,595,753 $ 1.67
FIL Limited Substantial Shareholder 26 Jul 2016 BUY 182,000 $ 334,789 $ 1.84
Mondrian Investment Partners Substantial Shareholder 1 Aug 2016 SELL 16,000 $ 29,106 $ 1.82
Avraham Eshed** Non-Executive Director 9 Aug 2016 EXERCISE 375,000 $ 150,000 $ 0.40
FIL Limited Substantial Shareholder 31 Aug 2016 SELL 1,817,600 $ 3,371,648 $ 1.86
Share Buyback Company 22 Nov 2016 BUY 40,000 $ 67,703 $ 1.69
Eyal Mashiah*** Executive Director 17 Mar 2017 SELL 864,700 $ 1,536,242 $ 1.78
Avraham Eshed Non-Executive Director 17 May 2017 SELL 43,800 $ 80,583 $ 1.84
Avraham Eshed Non-Executive Director 18 May 2017 SELL 50,300 $ 90,036 $ 1.79
Avraham Eshed Non-Executive Director 19 May 2017 SELL 95,900 $ 169,450 $ 1.77
Avraham Eshed Non-Executive Director 24 May 2017 SELL 131,100 $ 228,114 $ 1.74
Share Buyback Company 10 Jul 2017 BUY 250,000 $ 369,799 $ 1.48
Share Buyback Company 10 Aug 2017 BUY 50,000 $ 73,141 $ 1.46
Share Buyback Company 30 Aug 2017 BUY 30,000 $ 44,165 $ 1.47
Share Buyback Company 7 Sep 2017 BUY 40,000 $ 52,027 $ 1.30
Share Buyback Company 14 Sep 2017 BUY 30,000 $ 38,712 $ 1.29
Share Buyback Company 18 Sep 2017 BUY 17,700 $ 20,648 $ 1.17
Share Buyback Company 18 Sep 2017 BUY 20,000 $ 24,014 $ 1.20

* Off-market transaction
** Avraham Eshed has sold 321,100 of the 375,00 shares he obtained through exercising his options at $0.40/share
*** Eyal Mashiahs term of service as Executive Director ended on 25 April 2017