Sarine reverses into the red in 3Q; launches equal access share buyback offer
Sarine Technologies, the provider of diamond grading services and seller of diamond grading machines, reversed into the red in the third quarter due to a cloudier outlook for the global economy. On Nov 19, Sarine reported a 25% y-o-y drop in revenue and a loss of just under US$1 million ($1.34 million) in 3QFY2023 ended Sept 30.
On Nov 17, just days before the earnings announcement, the company had bought back 75,000 shares on the open market at between 28.5 cents and 28.9 cents each.
This brings the total number of shares bought back under the current mandate to 1.174 million. Over the past few months, Sarine, listed on both the Singapore and Tel Aviv exchanges, has been steadily buying back its shares. On Nov 15 and 16, the company had acquired 31,000 shares at 29 cents and 40,000 shares at 29 cents.
The same day it reported its earnings, Sarine announced an off-market equal access share buyback offer. Under the offer, the company is offering to pay 34 cents for up to four million shares now held by other shareholders.
The volume is equivalent to 1.15% of its total share base. Entitled shareholders can accept in full, or in part, shares that they now hold at a price that is a premium to the prevailing market price. Year to Nov 21, Sarine shares have dropped by around 27% to close at 28.5 cents.
According to executive chairman Daniel Benjamin Glinert, Sarine’s shares are “significantly undervalued” due to “prevailing market uncertainties”. Sarine’s board says it is “fully committed” to creating long-term shareholder value and that the equal access offer is the “first step” in the company’s strategy to realise this substantial value.
Meanwhile, Sarine warns that overall industry conditions are likely to remain challenging for the rest of FY2023. “Our traditional businesses of selling capital equipment and, to a lesser extent, our Galaxy scanning services, will remain affected under negative market conditions,” says the company in its earnings commentary.
“However, the significant reduction in the supply of rough diamonds will reduce polished inventories and contribute to price stabilisation and eventual recovery, expected in the first half of 2024,” it adds.
Nonetheless, there are other challenges. The Israel-based company says that 10% of its headcount has been mobilised to help with the ongoing war.
“Notwithstanding the considerable effects
of the events on the Israeli society and economy as a whole, management has evaluated the potential disruptions to the group’s supply chain, manufacturing, sales and marketing and research and development activities, and has prepared appropriate contingency plans. Management is continuing to closely monitor developments on an ongoing basis, and will update the public on any material developments,” says Sarine.
DBS Group Research is not too upbeat about Sarine. “The diamond market continues to be impacted by elevated inflation and the risk of a recession. Demand from the US, which accounts for roughly half of global diamond demand, is likely to remain soft given the sluggish macroeconomic outlook. This could, in turn, dampen Sarine’s revenue,” say analysts Sachin Mittal and Amanda Tan in their Nov 21 note.
Following the 3QFY2023 results, the DBS analysts have reduced their revenue estimates for FY2023 and FY2024 by 14% and 15% respectively. This led to earnings estimates for FY2023 and FY2024 being lowered by 89% and 16% respectively.
The analysts have also cut their target price from 30 cents to 25 cents, which is pegged to 21x forward FY2024 earnings. The 21x multiple is below its historical mean, taking into account the continued softness in diamond markets.
“We maintain our ‘fully valued’ call, as the current macroeconomic environment is clouded with uncertainty and the diamond markets are unlikely to regain their shine anytime soon,” Mittal and Tan note.