On November 13, 2024, Sadot Group (NASDAQ:SDOT) reported 3rd quarter 2024 results which showed revenues that were above expectations. Commodity revenues increased 11.6% to $200.9 million from $180.0 million in the 3rd quarter of 2023. This was primarily due to increased transaction levels and new contributions from Sadot Canada. During the quarter, the agri-foods business completed 24 transactions of over 500,000 metric tons of agri-commodities across 14 different countries.
Gross profit in the commodity segment for the 3rd quarter was $2.2 million (1.1% gross margin) and operating income was a loss of ($325,000). As the company builds out its platform in various regions, SG&A expenses have become temporarily elevated. As the commodity business matures and the business becomes more vertically integrated and transactions evolve beyond bulk trades, the company expects operating margins to be in the 1.0%-3.0% range. Company defined EBITDA was $2.9 million in the 3rd quarter compared to an EBITDA loss of ($4.4) million in the prior year period.
Net income was $1.2 million in the 3rd quarter compared to a loss ($5.2) million in the 3rd quarter of 2023.
The increase in net income was driven by positive gross profits and by a gain on fair value remeasurement of $5.5 million related to forward purchase and sales contracts enacted in 2023.
Consolidated operating cash flow was approximately $7.0 million for the first nine months of 2024 compared to a use of cash of ($8.7) million for the prior year period. Primary uses of operating cash flow for the first nine months of 2024 were $5.8 million used for farmland deposits as well as debt paydown of $1.9 million.
Cash at the end of the 3rd quarter was $962,000 and net working capital was positive at $18.9 million. The company utilizes most of its cash for its revenue generating trading activities and therefore does not maintain large cash balances. Total company debt was $2.8 million at the end of the 3rd quarter. Subsequent to the end of the 3rd quarter, the company paid off all the Yorkville related debt of approximately $800,000.
The Contract Liability was $92.3 million at quarter end which 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.
Indonesia Farmland
During the 2nd and 3rd quarter of 2024, the company placed deposits on, and is in negotiations for the acquisition of an agricultural farming property in Indonesia. This farmland produces coconuts, vanilla beans, and eventually corn and other commodities. The total value of deposits year-to-date is approximately $5.8 million.
Restaurant Segment Update
During the 3rd quarter, the company closed on its sale of its SuperFit Foods concept. Back in August 2024, the company announced it had found a buyer for this business.
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.
The company currently does not own any restaurants and is now a fully franchised concept. This is expected to better position the company to 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.
Management stated there are currently multiple parties engaging in due diligence to potentially acquire these restaurants.
Trade Finance Arrangements
The company indicated that it still has over $20 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. The company reported this division generated approximately $20 million in revenues in the 3rd quarter of 2024.
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.
Sadot Canada initially plans to focus on two lines of business - container-based pulses exported from Canada to global customers, and animal feed ingredient blends sourced globally and imported to North and South American customers. Sadot Canada will also work with Sadot's other international teams to create synergistic cooperation, such as sourcing pulses in the Black Sea region for global trade.
Valuation and Estimates
Our price target to $18.00 at this time as we believe the company is on the path to generate increasing free cash flow going forward. High margin trading activity and increased ancillary services will help increase gross and operating margins.
Due to the variability and timing of trading results and sales contracts, EPS estimates are difficult to predict with any reliability. We are conservative in our EPS estimates and prefer to recognize free cash flow and margin improvements as the key factors in predicting our target price.
We adjust our 2024 revenues and EPS estimates based on recent financial results and management commentary. For 2024, we expect $718.4 million in revenues and EPS of $0.82 per share. Our 2025 revenue estimate is $759.5 million, and our 2025 EPS estimate is $0.49.
SDOT stock is also trading at approximately 69% of book value per share whereas many peers in the commodity sector are trading 25%-50% above book value.
The company’s Enterprise Value is approximately $20 million. With revenue expectations of $728.4 million in 2024 and over $750.0 million in 2025, the current EV appears to be irrational and more reflective of the ongoing microcap stock malaise as opposed to company fundamentals.
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