Besides using technology to grade diamonds, Sarine will be able to provide traceability amid a rising interest in sustainable products.

 

THINK diamonds and the first thing that comes to mind would be the sparkling gemstones that adorn luxury items - an object of desire for many. Behind some of the technology that helps transform rough diamonds into polished gemstones over the past three decades is mainboard-listed Sarine Technologies.

 

The company has lately begun looking to take its technologies downstream towards the retail segment - including using technology to grade diamonds and provide traceability - as a long-term growth driver for the company, Sarine' s chief executive David Block told The Business Times in an interview.

 

Established in 1988, Sarine' s first technologies were developed for the manufacturing segment - taking a rough diamond and turning it into a final polished product. " Most people don' t know but that' s a very complex process that has many, many different stages," Mr Block said.

 

The Israel-headquartered company has products that provide the ability to scan a rough diamond internally and externally. With the three-dimensional information, manufacturers would be able to design and plan what polished diamonds can result from a rough diamond.

 

Before Sarine came up with this technology, Mr Block said, the manufacturing process was very manual - based on skill and experience - and not very effective. He added that Sarine is the market leader in terms of use of such technology in the diamond manufacturing segment, with around 70 per cent market share.

 

Close to half of Sarine' s current revenue is recurring, Mr Block noted. Clients purchase machines from Sarine, but also pay on an ongoing basis for the processing of data from the machines that are connected to Sarine' s cloud servers.

 

e-Grading

 

In the past decade, Sarine has also begun to explore new areas for growth.

 

" We' re not moving away from the polishing and manufacturing," Mr Block said. " But we are adding to our portfolio products and services that are relevant for the downstream, which is the wholesale and retail segments of the industry."

 

One area that Sarine is focusing on is grading of polished diamonds using technology - a process the company refers to as e-Grading.

 

Most diamonds above a certain size are currently graded by a grading lab, using parameters such as colour, clarity and cut. " But this process is very manual, it' s done by people who have learned how to grade a diamond," Mr Block said, noting it is not very consistent.

 

Sarine has developed technology that enables the grading of diamonds based on artificial intelligence and machine learning. Mr Block said this enables Sarine to grade diamonds more accurately, consistently and effectively than it is possible with human graders.

 

Mr Block noted that the current practice of sending diamonds to grading labs involves substantial resources including shipping, insurance, and time. Over the next six months, Sarine is looking to enable its grading technology to be used in-house at customer facilities.

 

" If you can do that grading in-house, using our technology, that is a huge change. If you need to have a diamond graded, you can get it graded tomorrow," Mr Block said.

 

In a research note this month, KGI Securities analyst Kenny Tan said that the e-Grading business line could be a " game changer in the diamond grading industry" . Mr Tan has valued the segment separately from Sarine' s current business, on the basis of it having potential to shape the whole business composition in future.

 

Based on assumptions provided by Sarine' s management, KGI valued the e-Grading business at around US$0.30 to US$0.60 per share. But KGI has not included this in its target price for Sarine, as it is still observing adoption rates within the industry.

 

Traceability

 

KGI, which this month initiated coverage on Sarine with an " outperform" rating, currently has a target price of S$0.82. That represents an upside potential of 45.1 per cent from Sarine' s close on Friday at S$0.565.

 

Another area that Sarine is focused on is traceability of diamonds, amid a rising trend of customers interested in sustainable products.

 

Each diamond has unique properties, Mr Block said, similar to fingerprints in people. When a diamond passes through Sarine' s scanners at various stages of its life - starting as a rough stone at the mine, through the manufacturing process, and on to the retailer - the company is able to compare data in its cloud servers to track and verify it is the same diamond.

 

" It' s not information that is declared, but information that comes directly from our technologies," Mr Block said.

 

Amid rising sustainability concerns, the use of lab-grown diamonds has also been increasing. But Mr Block said this trend is only catching on in select segments of the market, and certainly not the luxury segment.

 

" I don' t think at this point there is any threat of lab-grown diamonds replacing natural diamonds," he said, adding that there is a place for both types in the market.

 

Sarine' s technologies are also suitable for lab-grown diamonds, he adds. Indeed, the company already has such customers. Mr Block noted, however, that the price points would be different as lab-grown diamonds are much cheaper.

 

" But we see this as an opportunity rather than a threat at this point in time because it can expand our customer base to additional clients using our technologies for additional purposes," Mr Block said.

 

Apart from e-grading and traceability, Sarine is also looking to provide the retail segment with digital information on diamonds. The company is also using technology to help miners evaluate the value of their diamonds and sell rough diamonds digitally, without needing diamond experts to fly to mines.

 

Sarine' s newer business segments currently account for around 5 per cent of total revenue, and management expects this to grow as the company adds to its portfolio of products for the retail segment.

 

The newer segments are also based on a recurring revenue business model, Mr Block said, adding that the company' s tech structure would also mean that additional revenue contributes to " significantly more profit" as there is no direct correlation between increased revenue and expenses.

 

" We should see slowly over time, both increased gross margin, as well as, of course, the increased revenues and profit," he said.

 

Like many companies, Sarine was also impacted by the global pandemic outbreak last year. Luxury retailers were hit by closures, impacting the diamond supply chain.

 

For the full year, Sarine saw revenue fall 20.2 per cent to US$41 million. It nevertheless managed to record a net profit of US$2.4 million, reversing a year-ago loss. This turnaround was due to lower operating expenses, as it worked to contain costs.

 

Dual listing

 

Since June last year, Mr Block said, things have started to improve as retail stores came back online. Manufacturing, too, has gradually improved to normal levels.

 

In an update this month for the quarter ended March 2021, Sarine reported revenue of US$17.3 million - its best Q1 since 2014. The company said there has been a strong resurgence in diamond manufacturing activities, spurred by renewed demand from retail resumption as well as reduced inventories from last year' s shutdowns. Net profit for the quarter stood at US$6.7 million.

 

In March, Sarine also announced plans to apply for a dual listing on the Tel Aviv Stock Exchange in Israel.

 

Mr Block said the objective was to enable exposure to a wider range of investors and increase liquidity. Apart from investors in Israel, the time zone makes it easier for US investors to buy Sarine' s shares. The dual listing process is expected to be completed this quarter. KGI' s Mr Tan expects the listing to be a positive tailwind for the stock.

 

Sarine faces some risks from the pandemic situation in India - where it derived around 70 per cent of revenue last year. The industry has only seen slightly lower manufacturing levels so far, but the company has warned that the situation is very dynamic and could deteriorate. Mr Block still expects 2021 would be a fairly good year for Sarine, after the Covid-19 crisis last year.

 

" We still have growth in some of our old products, but the main growth driver is our new products for the retail (segment)," he said. " And as we increase those sales that will increase the revenues and drive the profits as well."