Overview of the Business
Sarin was established in 1988 and is headquartered in Israel. It is the market leader in the development and manufacturing of advanced planning, evaluation, and measurement systems for diamond grading and gemstone production. Sarin is endorsed by gemological labs, diamond-appraisal businesses and leading manufacturers the world over.
Sarin’s products include rough diamond inclusion scanning and planning optimisation systems, gemology tools such as diamond cut, colour and light performance grading tools, laser-marking machines and polished diamond imaging systems. One of the products Sarin launched was the revolutionary Galaxy™ family of internal inclusion mapping systems for rough diamonds in 2009. It is touted that there is no other product or technology available in the market that is capable of rivalling the Galaxy™ family systems.
Financials
We will take a look at Sarin’s financials from Financial Year 2003 to 2012.
The revenue for Sarin has been increasing consistently, except for the dip in FY2009, due to the sub-prime crisis. Prior to FY 2009, Sarin mainly recognised revenue only at the point of sale of a product. Therefore, there was no recurrent revenue to speak of and revenue was highly susceptible to the vagaries of the market.
The company learnt from the episode and after the crisis, it came up with a recurrent revenue model where customers are charged per usage of the Galaxy™ family of systems. Clients pay one-time upfront costs and per-use fees based on the weight (carat) of the diamonds scanned. For FY 2012, the company had over 95 Galaxy™ family systems installed for its clients and the recurring revenue constituted over 25% of overall revenues.
The net profit has been increasing consistently just like the revenue, except for during the crisis. The company has an extremely high gross profit margin that averages 65.7% and a net profit margin that averages 23.8%.
The earnings per share (EPS) has grown 16.2% yearly from 1.56 US cents in FY 2003 to 6.03 US cents in FY 2012.
The company is flushed with cash with zero debt. The ROE stood at 37% in FY 2012. The ROE has been increasing since FY 2010, even though the cash balance has been increasing as well. This says a great deal about how competent the management is.
Sarin has been generating copious amounts of free cash flow. It generated S$19.0 million in free cash flow in FY 2012. The average capital expenditure stood at a mere S$1.5 million from FY 2003 to FY 2012.
The company has a dividend policy of paying a fixed dividend of 1.50 US cents per ordinary share every six months. Previously, it had a dividend policy of paying 1.25 US cents per ordinary share every six months. In May 2012, the company did a bonus issue to reward shareholders as well.
Insider Ownership
Hanoh Stark, Non-Executive Director of Sarin, owns 33.6% of the company and Daniel Benjamin Glinert, Executive Director and Chairman of the Board, controls 15.7% of Sarin. Uzi Levami, Executive Director and CEO of Sarin, owns 15.6% of the company. Collectively, they control 64.9% of Sarin.
Future Growth
The company said it is looking to launch its new product, Sarin Loupe™, commercially, next year. Another of its product, Sarin Light™, has been gaining traction in Japan and there’s growing interest from Hong Kong, Korea, Taiwan, Singapore and Thailand.
On 11th November 2013, it was announced by the company that a strategic agreement was signed between the New York Diamond Dealers Club (DDC), the leading diamond trade organization in the United States, and Sarin’s North American subsidiary – Sarine North America. DDC and Sarine North America have entered into a 5 year collaboration, where Sarine North America will provide the latest rough and polished diamond technology for the use of DDC’s members, and the DDC will exclusively promote and market those solutions to the U.S. diamond industry.
Valuation and Conclusion
The company is currently trading at a historical PE ratio of 25 and sports a dividend yield of 3%. As seen above, the EPS had grown only 16.2% yearly. Whether the company can grow at 25% per annum going forward is a big question.
Warren Buffett once said that, “Price is what you pay, value is what you get”. The company without any doubt has a sustainable competitive advantage. However, is paying 25 times its earnings, giving us value for our buck? That is a question potential investors have to ponder about.
Cheers!
Sudhan, Business Analyst
Mind Kinesis Value Investing Academy
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