Sarine Technologies Ltd (SI:SARI) YTD (Jan to Sep) profitability was relatively subdued, with lower equipment sales due to excess midstream inventories in Q2 and Q3, as well as the illicit actions of competitors. Simultaneously, Sarine incurred considerable R&D costs related to the development of Clarity and Colour grading technology and Sarine Profile. This was further exacerbated by the strengthening of the Israeli shekel. However, downstream demand remains strong (according to the company), while new products and lower R&D expenses should support earnings going forward. Sarine trades on a P/E of 16.3x FY17e, a 35% discount to the peer group.
Unexpected continuation of midstream weakness
Sarine reported a net loss of US$0.5m in Q317 (compared with a US$4.0m profit in Q316), affected by low capital equipment sales. This was the result of persistently high surplus inventories of polished diamonds in the midstream (Sarine’s core end-market). The company’s performance was further impaired by the illicit activities of its competition, as the process related to the legal actions initiated by Sarine is still in progress. Consequently, group sales declined by 34.6% y-o-y and 37.8% sequentially (compared to a historical Q3 vs Q2 drop in the range of 20-40%).
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