Posted by: donmihaihai | April 19, 2008

Sarin: The goods, the bads and acquisitions.

Acquisitions

 

Sarin subsidiary was granted a patent in South Africa for the invention of disposable polishing disc recently. It was a positive move because despite after a lengthy period, the disposable polishing disc have not reach the commercialising stage yet even though it is seem to be a recurring revenues generator, the 1st for Sarin. South Africa is the next emerging cutting and polishing diamond centre so getting a patent there can also mean that Sarin is going to put a heavy footprint there.

What are the chances that a big portion of valuable stuffs like diamond be transacts online? I have no idea. But the management seems to think so because they paid USD2.3 million for 23% of IDEX Online with an option of buying more in 24mths. IDEX Online seem to be the leading Online B2B diamond portal so if like the management said and IDEX Online becoming the leading niche business, having a associate stake in IDEX Online is a good way to participate it. The problem now is that the IDEX Online doesn’t seem to be generating much revenue at this moment with net book value of US$56,000 which is after the last cash rising in 2006. It is burning cash at a fast rate?

While the acquisition of an associate stake in IDEX Online seem to a far shot, the latest acquisition of Galatea is a different story, it is an acquisition of technology. A sense of proportion 1st, Sarin paid US$10.77 million and additional 3 possible payments in the future. A single technology not commericalise yet is worth >US$10.77 million or >S$14.6 million compare to Sarin, a well establish with a portfolio of technologies and brand name is valued at S$94 million. So did Sarin over paid for Galatea or Sarin is extremely undervalued?

The acquisition of Galatea is a bolt-on acquisition as it will enhance the total value of Sarin’s products. It is also a way to eliminate another potential competitor as they will be fighting in the same area of mapping and optimising the cutting of rough diamond so in another word, it is possible that Galatea worth more together with Sarin than being alone.

Galatea was making a lost of US$1.3 million with a negative NBV of US$22,000 in 2007. These 2 acquisitions will turn a cash rich Sarin into a company rich in goodwill. If the acquisitions does not work out well, about $17 million of goodwill(cash) can be throw away with no resale value.

I have been waiting for sometime for insider acquisition of shares since Sarin share price is depressed for quite sometime and it happened right after the announcement on the acquisition of Galatea. Small amount but pretty good consider the amount of shares actively trade daily.

The goods

 

Just like the previous annual report, 2007 report is another good read. The Company is pretty open in their commentary on the company, the direction they are heading to and possible setbacks in the coming future. It is lengthy but that is what shareholder like me wants. Fanciful charts and tables are useless to me because what presented there can be easily found inside the financial statement, in fact, more can be find there because it usually contain information that are awful which usually don’t goes into these charts/tables. But Sarin can do better in term of communicating on the performance of the management which is lacking but very useful because of the structure of Sarin.

Why is it so? Usually there are 3 type of management structure in listed company which are 1) Manage by founder/s or majority shareholders with or without professional. 2) Manage by professional but oversee by founder/s or majority shareholders as in board of directors and 3) Manage by professional and board of director with no much interests in the company share(not through exercise of share options). Most of the companies listed in SGX belong to the 1st type because of the size and short history of capitalism in Singapore and China. Sarin belong the 2nd type which is professional managed. Because of technology driven and innovative content of their products, the compensation must be high or right to prevent able people from leaving and even becoming a competitor. The incentive must be right. While I do not know whether it is ok at the moment but 2007 annual report provided information pointing toward this direction. The remuneration package is adjusted upward because of the depreciation of USD to NIS. Next there are share options which I hope can create ownership among the management team.

New products launch also point toward the direction where Sarin is heading toward, which are the wholesale and retail areas. This opens up more possibility of the niche market and pushes the saturation of market further into the future. With widening of the product offer, the chances of Sarin going into other niche industry with niche equipment also increase. This is not a sleeping company.

The bads

 

While the management and directors are being compensated for their hardwork and the depreciating USD, minority shareholders are not. Which also mean the benefit goes to one way only. Sarin has not addressed how they are managing the USD and NIS so that there is no leakage because of the currencies movement. Sitting at a cashpile in USD clearly destroying shareholder value(with help of hindsight), since Sarin operate mostly in Israel and pay dividends in NIS and SGD, isn’t it better to deposit unused cash in NIS and SGD rather than USD? This will also prevent the possibility of investing in CDO(my worry that become true). While it is a small amount of one million, what matter more is why and how they do it rather than the amount involved. At this moment it seem like unauthorised trade had been carried out by Credit Suisse (USA) and legal action is being taken, I do not understand why USD0.5 million is being accounted as receivables rather than being write off or included in the financial assets. Neither the chairman commented on this in the annual report, the only positive part is that announcement was made after that on the legal issue.

The issuing of stock options is another worry part. It is not the size which is quite small at this moment, but the possibility of opportunistic by the board of director as the share price keeps declining. Beside that they are also asking for granting of stock option to independent directors which make up of the majority of the remuneration committee and major shareholders. Are they trying to maintain their ownership by compensate these directors well? Worse still, since this AGM is going to carry out in Israel, most retail shareholders from Singapore are unable to vote which mean this resolution is as good as being pass without question.

The basic right of shareholder is being taken away cleverly as Sarin decided to carry the coming AGM in Israel because only those attending at the actual place can vote. While there is a video conference for retail shareholder to ask, post question and communicate, it is not the same, it is as good as saying, “You are not welcome”. What is the reason behind this move? Is it that because of this those dividends payouts were carried out in 2nd and 3rd of 2007?

Thinking about it, there is a possibility that Sarin is not happy with the valuation of their share price and would they want to delist from here to list at maybe Nasdaq or somewhere else where investor can appreciate the value of the company? Let hope that this is not the case.

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Responses

  1. Good observation!

    The number of shareholders in 2007 are only 693, and 1mil shares and above with >90%. In 2006, number of shareholders was over 1000 ppl.

    So, Sarin could delist from SGX effortlessly.

    Vested interest

  2. Effortlessly? Maybe not.

    Because of your comment I take a look at the listing manual and I am unable to find any regulation on minimum no. of shareholder required for continuious listing. Perhaps there is in Company Act but I doubt so. If yes, please direct me. Thanks.

    What you pointed out is just one variable and there are other variables too. Like

    1) % of share control by the inner group should be less than 60%.

    2) While the number of shareholder reduced, the number of weak shareholder reduce while the number of strong shareholder increased.

    3) The price they are paying. Currently any price less than $0.60 is unlikely to delist Sarin. In fact, I think to delist Sarin, they need to pay much higher price than that for strong hands to give in.

    4) etc, etc.

    But if the controlling shareholders are not happy with the listing, it is usually not a good sign.


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