On May 15th, 2024, the company (NASDAQ:SDOT) reported 1st quarter 2024 results which showed revenues below expectations due to a slowdown in China’s wheat imports. The global wheat market was shaken up as Chinese buyers canceled major orders in an attempt to secure better prices and bolster the country's food security. Last month, the USDA said 504,000 tons of wheat sales to China had been canceled. The figure is equivalent to about half the total U.S. wheat shipments to China in 2022 and the largest cancellation on record going back to 1999. For Sadot, wheat represents about 37% of their commodity business on a global basis.
In addition, revenues were negatively affected by the company’s proactive decision to reduce credit overexposure to certain clients in an attempt to manage overall risk with certain clients.
For the 1st quarter, total revenues decreased to $107.9 million compared to $212.9 million in the 1st quarter of 2023. Commodity-related revenues were $106.5 million and restaurant sales were $1.4 million. Consolidated gross profit was ($340,000) in the quarter compared to $4.6 million in the prior year period.
Net income in the commodity segment for the quarter was $1.6 million and in the restaurant segment, there was a loss of ($1.1) million. EBITDA from operations was $0.5 million in the 1st quarter of 2024 compared to ($0.4) million of EBITDA in the 1st quarter of 2023. Consolidated operating cash flow was $2.6 million and free cash flow was approximately the same.
Cash at quarter end was $1.2 million and net working capital was positive at $13.2 million. Total assets decreased to $150.5 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 $3.6 million at the end of the 1st quarter and the Contract Liability was $92.1 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/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
Sadot Group announced that they had Initiated the process to sell the Sadot Food Services segment. In the 2nd quarter of 2024, the company signed Letters of Intent and is currently in the due diligence phase with two separate groups to purchase the Pokemoto and SuperFit Foods assets.
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 $6.95 million under Assets Held for Sale. This represents the lower of its carrying value, or fair value less cost to sell, which 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 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.
Valuation and Estimates
We maintain our price target of $3.50 at this time as we believe 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 $609 million in revenues and an EPS loss of ($0.02) per share. We expect Sadot to generate positive net income in 2025.
We also note that SDOT stock is selling below tangible book value per share. Based on $25.1 million in shareholders equity as of March 31, 2024 and 54.7 million shares outstanding, we calculate that book value per share is approximately $0.46.
The current stock price does not likely reflect the potential levels of profitable growth going forward.
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