Sadot Group Potential Profitable Growth Going Forward Supports Price Target of $3.50.

By Thomas Kerr, CFA

For the 2023 fiscal year ending December 31, 2023, total revenues increased to $726.7 million compared to $161.7 million in 2022. 2023 was the first full year of operations for the new commodity related segment, Sadot Agri-Foods. Commodity related revenues were $717.5 million and restaurant sales were $8.1 million. Consolidated gross profit was $9.9 million in 2023 compared to $4.4 million for the prior year period.

Net income in the commodity segment for the year was $9.2 million and in the restaurant segment, there was a net loss of ($2.7) million. Restaurant net earnings were significantly affected by impairment charges totaling $1.6 million. Non-GAAP adjusted EBITDA from operations was $0.1 million in 2023 compared to a ($2.0) million loss in 2022. Operating cash flow was a use of cash of ($13.1) million as the company invested heavily in its Sadot Agri-Foods subsidiary by using its own balance sheet to facilitate trading activity.

Cash at year end was $1.3 million and net working capital improved to $8.3 million. Total assets increased to $178.1 million compared to $27.2 million in 2022. Total company debt was $7.1 million of which $3.6 million was convertible debt under the SEPA agreement.

Sadot Group SDOT recently decided to explore strategic alternatives for its restaurant operations in order to focus solely on its commodity related businesses. The company has engaged Lisiten Associates in New York who are specialists in the sale of restaurant concepts. The company is unable to provide a timeline on when, or if, a transaction will occur. Since the acquisition of Pokemoto in 2021, the company has increased the size of its restaurant operations substantially and currently has over 60 franchise agreements for new Pokemoto locations that have not yet opened.

The company indicated that it has approximately $15-$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.

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.

Also, a growing part of the world's population is in areas that have highly limited agricultural potential and require systems in place to provide a steady in-flow of food products.

On January 9, 2024, the company announced that it had executed an agreement with two distinguished professionals in the international grain trading business, Flavio de Campos and Paulo de Sa, in order to begin operations and management of a new trading arm called Sadot Brasil Ltda., a wholly owned subsidiary of Sadot LLC.

Sadot Brasil will source and export grains such as soybean, soybean meal, wheat and corn. This expansion has the potential to generate multiple benefits for Sadot LLC as it further expects to substantiate the company's position as an international agri-foods company operating in many important grain producing geographies in the world.

The company continues to expand its operations in the various verticals of the global food and feed supply chain including farming, sustainability, and the trading and shipping of agri-commodities. The inception of Sadot Brasil Ltda. has the potential to provide growth in the trading verticals, managed by experienced industry professionals.

On December 20, 2023, the company released a new investor presentation in conjunction with its Annual Shareholder Meeting.

We maintain our price target of $3.50 as 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 $733.4 million in revenues and an EPS loss of ($0.10) 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 $19.6 million in tangible shareholders equity as of December 31, 2023 and 51,752,691 shares outstanding as of March 20, 2024, we calculate that tangible book value per share is approximately $0.56.

The current stock price does not likely reflect the potential levels of profitable growth going forward and instead mostly reflects short-term dilution related to a dilutive capital instrument that was part of the SEPA transaction executed in September 2023.