Zacks Small Cap Research – SDOT: Sadot Group’s Long-Term Growth Opportunities Supports Price Target of $3.50 – Technologist

By Thomas Kerr, CFA

NASDAQ:SDOT

READ THE FULL SDOT RESEARCH REPORT

On August 14th, 2024, the Sadot Group (NASDAQ:SDOT) reported 2nd quarter 2024 results which showed revenues that were above expectations. Commodity revenues increased 10% to $173.3 million from $157.6 million in the 2nd quarter of 2023. This was primarily due to the opening of Latin American trading operations and the addition of the farming business.

During the quarter, the agri-foods business completed 21 transactions of over 525,000 metric tons of agri-commodities across eight different countries. Also, the company shipped 2,500 metric tons of maize and over 690 metric tons of soya from the farming operations in Zambia during the 2nd quarter.

Gross profit in the commodity segment for the 2nd quarter was $1.99 million (1.1% gross margin) and operating income was $1.05 million (0.6% operating margin). As the commodity business matures and the business becomes more vertically integrated, the company expects operating margins to be in the 1.0%-3.0% range. EBITDA was $3.2 million in the 2nd quarter compared to $0.7 million in the prior year period.

Net income was $2.4 million in the 2nd quarter compared to $0.2 million in the 2nd quarter of 2023. The increase in net income was largely driven by a gain on fair value remeasurement related to forward purchase and sales contracts enacted in 2023. Consolidated operating cash flow was $11.0 million for the 1st half of 2024 compared to a use of cash ($4.2) million for the prior year period. Free cash flow for the 1st half of 2024 was approximately $10.3 million. Cash at the end of the 2nd quarter was $9.9 million and net working capital was positive at $16.1 million. Total assets decreased to $165.8 million compared to $178.1 million at the end of 2023 due to the timing of payments on accounts receivable relating to trades.

Total company debt was $3.7 million at the end of the 2nd quarter and the Contract Liability was $92.3 million. The Contract Liability relates to Forward Sales Contracts in which the company has pre-sold 140,000 tons of soybeans for $93.5 million. Half of the contract is due for delivery in November and December 2024 and the other half is due in May 2025. The company recognizes revenue upon delivery of the product to buyers.

Restaurant Segment Update

On August 6th, the company announced the sale of its Superfit Foods concept, a subscription-based meal prep concept located in the Jacksonville, Florida region. Also, Sadot announced that it has refranchised its final company-owned Muscle Maker Grill location in New York which will lower corporate G&A expenses by approximately $425,000 and begin to generate royalties for the restaurant division. Cash proceeds from these transactions are expected to be approximately $400,000 and are expected to be received in the 1st quarter of 2025.

With the MMG restaurant concept now being a fully franchised concept, it is expected to be better positioned to potentially attract a wider audience base of interested parties. The company continues to pursue the divestiture of Muscle Maker Grill along with its 39-unit Pokemoto chain.

The sale of these assets is subject to customary closing conditions and remains subject to the satisfactory completion of due diligence by the buyers. The potential terms of the deal including purchase price were not provided by management at this time. However, the assets of the restaurant group are carried on the balance sheet at $6.3 million under Assets Held for Sale. This represents the lower of its carrying value, or fair value less cost to sell, which is essentially the minimum price the restaurant group would sell for based on management’s valuation estimates at this time.

Trade Finance Arrangements

The company indicated that it still has approximately $26 million in trade financing arrangements in place. The ability to use trade finance arrangements is crucial to increasing margins in the Sadot Agri-Foods segment as it does not typically utilize the company’s own capital or balance sheet. Trade finance arrangements can come from a multitude of sources including traditional banks, finance companies, and private investors. Trade finance arrangements can take the form of letters of credit, guarantees, insurance, export finance, trade credit, factoring, or supply chain finance.

The growth of top-line revenues and bottom-line margins is directly linked to increasing access to trade financing. The company is actively working on obtaining additional trade finance lines to further support its growth initiatives.

Canada Trading Division

On July 9th, the company announced the formation of its latest commodity trading arm, Sadot Canada. This will be a wholly owned subsidiary of Sadot LLC based in Toronto, Canada and will originate and trade Canadian grains, oilseeds and pulses to a global customer base.

Canada is one of the world’s most important agri-commodity regions that exports over 75% of its agri-commodity production. The country is a major producer and exporter of grains such as wheat and barley, oilseeds like canola and is one of the dominant export markets for key pulses crops such as peas, lentils, beans and chickpeas. In 2021, Canada harvested 8.8 million acres of pulses, which contributed $6.3 billion to the economy and 25,907 jobs. Canada exports 80% of its pulses with 74% of pea production and 81% of lentil production going to other markets.

Growing Demand

Sadot Group sees growing demand for its services as the demand for food and feed is projected to grow significantly through the end of the century. This demand will likely place stress on the global food supply chain. With the pivot to the agri-foods supply chain sector, Sadot Group sees significant growth potential in providing sustainable solutions to address the world’s food security issues.

Feeding the world’s growing population is a significant challenge. The United Nations projects that the global population will grow from today’s 8.1 billion to 9.7 billion by 2050 and 10.1 billion by 2100, with growth concentrated in developing countries.

Urban expansion, global warming, and corrupted farmland contribute to a steady decrease in fertile agricultural land needed to grow grains and legumes which are the building blocks of nutrition and human health. The growing middle class populations in developing countries within Africa and Asia result in more calorie per capita consumption in general and specifically, growth in demand for animal proteins. Both of these factors increase the demand for feed related commodities for animals.

Valuation and Estimates

We maintain our price target of $3.50 at this time as we believe the company’s ability to generate significant levels of free cash flow should occur within the majority of our 10-year DCF time frame.

We adjust our 2024 revenues and EPS estimates based on recent financial results. For 2024, we expect $622.5 million in revenues and EPS of $0.04 per share. Our 2025 revenue estimate is $643.2 million and our 2025 EPS estimate is $0.06.

Currently, SDOT stock is trading at approximately 8.0x our 2025 EPS estimate. The stock is also trading below book value per share whereas peers in the commodity sector are trading 20%-30% above book value.

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