When I first wrote up this idea, Sarin was trading at $1.40. Since then, the price had run away somewhat, with the price hovering around $1.50. Nonetheless, I believe that there is still some room to go. Additionally, given the inherent volatility of an illiquid stock, investors can capitalize on future weaknesses in the price to add to the position.
The full writeup is on my blog:
sgvalueinvesting.wordpress.com/2013/06/1...es-ltd-1662013-1-44/
I shall just highlight some of the key points here:
Business Overview
Sarin Technologies Ltd is a market leader in the diamond manufacturer market. It develops, manufactures, markets and sells precision technology products for the processing of diamonds and gemstones. Its products provide smart solutions for every stage of the rough diamond manufacturing process. In addition to its dominance in the rough diamond manufacturing market, it is currently attempting to expand into the polished diamond market with new products, which will provide further avenues for growth.
Growth Drivers
1. Aggressive rollout of Galaxy/Solaris inclusion mapping system
Turning a rough diamond into a polished diamond for sale typically requires many hours of processing by a team of expert personnel. Sarin has revolutionized the industry with its Galaxy/Sarin platforms. Galaxy/Solaris inclusion mapping systems are the ONLY products in the market that offer manufacturers a fast, automated and comprehensive mapping of diamond inclusions.
With the high cost of rough diamonds, manufacturers’ typical margins are very low, and single-digit percentage yield increases or cost savings translate into significant impact on profits. As such, they have proven very receptive to Galaxy/Solaris, with the installed base growing very strongly, from 20 in 2009 when it was first introduced, to more than 100 in Q1 2013. Management expects sales of Galaxy/Solaris to continue to accelerate throughout 2013.
Meanwhile, competitors are hard-pressed to offer a better alternative. According to the 2012 annual report, the closest competitor’s product is still in its developmental stage, and preliminary research has indicated that its performance is sub-par to Sarin’s.
2. Entry into polished diamond trade
With its Sarin Light and Sarin Loupe products, the Group is intending to break into the polished diamond trade, where it has a relatively less well known presence among the retailers. It is difficult to estimate how successful the Group will be in this endeavor; however, management has indicated that initial feedback for the Sarin Light at trade shows have been very positive. Historically, management also has a strong track record of introducing successful products into the market.
Another point to note is that currently, there is no industry standard on objectivity of Light Performance Reports; if Sarin manages to establishes its Light Performance Reports as the leading industry standard, the market potential is significant. Sarin Light has already tested over 22,000 stones, and the reports display a high degree of correlation with the stone’s perceived beauty. The opening of Sarin’s new offices in New York will further increase its presence in the polished diamond market.
Management
Sarin is helmed by a capable management team with strong insider ownership. The company has a history of increasing dividends. For FY2013, dividend guidance is US 3 cents, although this guidance is conservative and management often give out further distributions when results are better than expected(as per 2012). Under their leadership, Sarin has enjoyed aggressive topline and bottomline growth. More significantly, a look at recent results indicate that EBIT margin is growing all these years, pointing to a lack of credible competition. Sarin is continuing to dominate the market and has built a strong economic moat with significant pricing power.
Quality of Earnings
Traditionally, Sarin used to depend on sales from capital equipment for its revenue; in recent years however, it is shifting to a recurring revenue model, by charging a smaller upfront fee for installation of the Galaxy/Solaris system and a per-use fee for each scan. This recurring revenue model should be more stable and less affected by economic downturns in the future.
Valuation
While not cheap based on traditional metrices such as P/E and P/B, a free cash flow analysis on my blog shows that there is additional value to be captured from the current price. Further, I have not accounted for future earnings from Sarin Light and Sarin Loupe, which will provide additional value.
Catalysts
1. Increased deliveries of Galaxy/Solaris products
2. Additional agreements with major retailers on adoption of Sarin Light
3. Commercialisation of Sarin Loupe
4. Share buyback/Increased dividends
5. Additional sell-side coverage
Conclusion
In sum, Sarin provides an excellent GARP opportunity: Growth At A Reasonable Price. Other than the current strong suite of products (particularly Galaxy/Solaris) which will drive growth in the near term, there is further option value in its entry into the polished diamond market with new product launches. As an illiquid stock, future weaknesses in the price would be a good opportunity for accumulation. Management is shareholder-friendly, has an excellent track record and should never present you with a reason to sell.
