S&W Seed Posts A Better Quarter And Signs A Promising Biofuel Agreement

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Turnarounds are a small for illustration increasing crops - you hole nan section arsenic champion you can, works nan seeds, and past you wait. I ne'er expected nan imaginable turnaround astatine S&W Seed (NASDAQ:SANW) to hap successful conscionable 1 twelvemonth (let unsocial conscionable 1 quarter), but a coagulated consequence successful a seasonally slow 4th and a promising and perchance important biofuel statement pinch Shell (SHEL) are some encouraging developments since my past update.

I'd be aware readers not to get excessively excited excessively soon astir nan biofuel agreement. The thought of increasing improved camelina arsenic a screen harvest and biofuel feedstock is simply a bully one, but this is fundamentally a aviator task for Shell and there's a agelong measurement to spell earlier this is simply a genuinely viable commercialized venture. By nan aforesaid token, advancement is progress, and I for illustration nan agreement, arsenic good as nan maturation successful Double Team sorghum successful nan U.S.

Fine Results In A Seasonally Slow Quarter

The December quarter, S&W's fiscal 2nd 4th is ne'er a peculiarly beardown quarter, truthful I impulse investors not to tie excessively galore conclusions from nan numbers. By nan aforesaid token, outperforming successful an off-season 4th is still a invited improvement connected balance.

Revenue roseate 2% successful nan quarter, but gross from nan halfway seed business grew much than 8%, pinch $1M year-over-year maturation successful nan North American sorghum business (Double Team) and $1.9M maturation successful nan Middle Eastern alfalfa seed business. This was offset by declines successful Middle Eastern sorghum income and U.S. alfalfa sales, but S&W came retired up connected equilibrium (and up of my expectations).

Adjusted gross separator improved almost 8 points from nan year-ago period, while adjusted EBITDA improved by $1.9M to a nonaccomplishment of $4.6M.

S&W ended nan 4th bladed connected liquidity, which is an ongoing important concern, but I'll reside really this business has improved precocious successful conscionable a moment. Finding sources of liquidity is going to beryllium important for S&W. There's an aged cliché from car racing that goes, "to decorativeness first, first you must finish" and that's existent present arsenic good - it doesn't matter really promising Double Team sorghum aliases stevia aliases camelina whitethorn beryllium if nan institution is forced to severely dilute investors to raise much capital.

A Biofuel Deal With Shell - Potentially Major, But It Will Take Time

Earlier this month, S&W announced that it had reached an statement pinch Shell to create caller works genetics (seeds) for oilseed screen crops that tin beryllium utilized arsenic feedstock for biofuel production. The task will initially attraction connected a works called camelina.

The 2 companies are forming Vision Bioenergy Oilseeds, pinch Shell initially owning 66% (and S&W owning 34%), but pinch mechanisms successful spot for S&W to perchance go a 50-50 partner complete time. S&W is contributing its knowhow and technology, arsenic good arsenic its Nampa, Idaho processing and investigation facilities, while Shell is contributing rate and will besides beryllium responsible for producing biofuels astatine its North American facilities. The JV, VBO, will create and nutrient seed, waste it to farmers, bargain backmost nan camelina, statement for crushing, and past nonstop nan lipid connected to Shell facilities.

In forming nan JV, Shell is contributing $13M to nan JV and will make an further $12M costs of $12M successful 2024. Shell besides paid $7M to S&W directly, paid disconnected a $7M promissory note, and will make an further $6M costs successful February of 2024.

I see this a promising task for S&W. Camelina is already utilized for biofuel accumulation (Honeywell (HON), among others, has turned it into pitchy substance connected a constricted basis), arsenic it has nan advantages of comparatively precocious lipid contented (around 40%) and debased processing costs, arsenic good arsenic nan expertise to turn successful beautiful marginal ungraded and successful colder climates. Growing it arsenic a screen harvest is moreover much appealing; farmers usage screen crops to limit ungraded erosion and sphere ungraded value and turning a screen harvest into a imaginable root of profit has a batch of appeal, peculiarly successful cases for illustration this wherever nan farmers are guaranteed a purchaser for nan harvest they produce.

I do deliberation it is important to support nan imaginable of this task successful perspective. For starters, and this whitethorn look evident but you'd beryllium amazed really galore group don't recognize it, erstwhile you nutrient seeds you person to GROW them and that takes clip and acreage. That limits really quickly S&W/VBO tin standard up production. It's besides worthy noting that arsenic overmuch arsenic farmers whitethorn for illustration nan thought of getting paid for a screen crop, they thin to beryllium a blimpish bunch, truthful it whitethorn return immoderate clip enlistee farmers to participate.

Shell is simply a bully partner and 1 that is committed to biofuel - nan institution has a ample ethanol accumulation associated task (Raizen) pinch Brazil's Cosan (CSAN) that is 1 of nan largest and astir businesslike producers of ethanol successful nan world. Even so, position is important - this is simply a mini task for Shell and while I'm judge they're superior astir it, it's acold from a needle-mover for them. To quote Raul Julia arsenic Bison successful Street Fighter, "For you, nan time Bison graced your colony was nan astir important time of your life. But for me, it was Tuesday."

The Outlook

The $7M costs from Shell and nan payoff of nan $7M promissory statement do springiness S&W immoderate much-needed breathing room, but nan institution is going to beryllium liquidity-constrained for immoderate time. That is simply a awesome ongoing operating risk, and it puts moreover much unit connected nan institution to execute connected opportunities for illustration Double Team sorghum (a non-GMO herbicide-resistant sorghum) and IQ alfalfa. While I've ne'er been bullish connected nan company's efforts successful stevia, this excessively is simply a maturation opportunity fixed an ongoing aviator accumulation statement pinch Ingredion (INGR).

That awesome companies for illustration Ingredion and Shell spot S&W arsenic a worthwhile partner is encouraging. These aren't make-or-break deals for nan larger companies, but I don't deliberation they'd fuss astatine each if they didn't respect S&W arsenic a reliable partner pinch a future.

I proceed to judge that S&W could scope $100M successful gross successful FY'24 and make semipermanent maturation successful nan double-digits (off an admittedly debased base), but affirmative free rate travel is still immoderate measurement off. The VBO JV could thief accelerate that some, but location are still a batch of hoops to jump done earlier S&W tin beryllium evaluated arsenic conscionable different institution (in different words, wherever its expertise to proceed arsenic a going interest isn't a important facet successful nan consequence analysis).

The Bottom Line

I proceed to judge that 2x gross is simply a reasonable valuation for S&W. While agri-tech M&A has seen 3x gross aliases higher multiples, I judge a discount is successful bid fixed S&W's deficiency of profits and strained equilibrium sheet. The elevated consequence precludes maine from openly recommending this name, but I do find it an progressively absorbing speculation for those investors who tin judge nan risk.

Editor's Note: This article covers 1 aliases much microcap stocks. Please beryllium alert of nan risks associated pinch these stocks.

Stephen Simpson is simply a freelance financial writer and investor. Spent adjacent to 15 years connected nan Street (sell-side, buy-side, equities, bonds); now a semi-retired raccoon rancher. That past portion isn't wholly true. Probably.