By Ian Gilson, PhD, CFA
On May 09, 2018, S&W Seed Company (SANW) announced its 3Q18 earnings followed by a conference call. Revenue was above our projections, gross margins in line as were operating expenses. Consequently earnings were significantly better than street consensus also ahead of ours.
Sales to Pioneer/Du Pont were higher, offsetting the slight decline in 2Q18. The Saudi market, where S&W has a very significant market share, were still under the government mandated water restrictions and we expect a further decline in 4Q18. Last year 4Q17 Saudi sales were $5.8 million and could be below $1 million this year. This is the major reason why S&W has reduced its projections to revenue between $65 and $70 (implying 4Q18 revenue of about $11 million with no sales in Saudi Arabia) EBITDA between $2.0 and $3.5 million. The way we calculate EBITDA is slightly different to the way the company does and our current estimate is $1.0 million.
Gross margins increased due to a higher proportion of dormant alfalfa seeds (versus non-dormant) and this should carry through the 4Q18. Inventory in Saudi Arabia increased but overall inventory declined as compared to 2Q18. The company expects overall inventory to decline by fiscal 2018 year end and does not intend to discount prices as has been done in prior years.
The agreement with DuPont has been revised. Before, the sales included about $6 million of GMO varieties of alfalfa grown using Pioneer germplasm. The sales from GMO alfalfa to DuPont will drop to zero. S&W Seed has some GMO seed varieties of its own but seed sales from these will not be enough to offset the loss.
The Australian crop was close to last year's yield and volume, whereas the company had expected a larger crop. This not impact our estimates.
Stevia is getting closer to market!! With patent protection and the use of third party growers (S&W has a long association with growers in the Central Californian Valley) S&W will be selling stevia leaf and will possibly extract the glycosides for sales to USA users. The presence of Alan Willits, who has close to 30 years of experience at Cargill and presently leads Cargill's Agricultural Supply Chain business in Asia/Pacific, will be a major factor in S&W Seed's entry into this market.
Given the current stock price, the reduction in projections, the loss of part of the Pioneer business and no recovery in Saudi Arabia we have decided to reduce our target price from $8 to $5 a share.
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By Ian Gilson, PhD, CFA