Sarine Technologies Ltd (SI:SARI) top-line growth continues to be affected by the multiple challenges the midstream diamond business is currently facing, which impair the sector’s cash generation (and Sarine’s equipment sales). Having said that, scanning activity remains at record-high levels and management expects the number of scanned stones to increase by 20% in 2018. Moreover, corporate overheads and R&D expenses are being kept below last year. In the long term, lab-grown diamonds represent both a risk (which is however difficult to quantify currently) and an opportunity to Sarine’s business.
Profitability assisted by reduced operating costs
Sarine reported an EBIT of US$760k in Q318 (vs a small loss of US$11k in Q317) on the back of lower R&D, sales and marketing, as well as G&A expenses. Sales grew by 3.7% y-o-y to US$11.7m despite the downward trend in rough diamond purchases in the market, as recurring revenues (nearly 50% of group sales in 9M18) increased on the back of a growing installed base of Galaxy family systems (390 at end-September 2018 vs 330 at end-September 2017). Retail-related sales were up almost 20% y-o-y in 9M18 and made up more than 2% of group sales.
Midstream players facing multiple headwinds
Sarine’s performance is currently shaped by several external factors which affect the midstream industry in India. These include: 1) declining luxury goods sales in China amid the trade war with the US; 2) tightening bank lending as a result of the Gitanjali Gems scandal; and 3) Indian rupee depreciation creating a working capital shortfall. As a result, the cash flow situation of manufacturers has deteriorated visibly. Investor sentiment is also influenced by the uncertainties around the potential long-term impact of lab-growth diamonds (LGD) on the industry.
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