S&W Seed (SANW) is a global agricultural business focusing on alfalfa, sorghum, pasture, and sunflower seeds. It develops proprietary products using plant breeding and molecular techniques and sells over 600 seed products. Cleaning and processing facilities are located in Texas, New South Wales, and South Australia. S&W seed products are sold in over 40 countries, and management expects to introduce 20 new products during 2024.
In June 2023, SANW hired Mark Herrmann as their CEO. With a remarkable 35 years of experience in the seed industry, including a significant tenure at Monsanto, Mark brings a wealth of knowledge and a fresh perspective to our team. His recent role as the CEO/Founder of ACUMEN and AgReliant Genetics further underscores his leadership capabilities and his potential to steer S&W Seed toward greater success.
CFO Vanessa Baughman joined SANW on 05/2023. She brings extensive seed industry experience and insight into seed industry finances. Her financial tenure was as CFO at AgReliant Genetics, the largest North American seed company, from January 2000 to January 2019, and as a finance executive at Monsanto Company.
Initiatives and Financial Progress during Q3 2024
Double Team's proprietary sorghum trait technology will be planted on over 10% of all acres in the United States during 2024, double the amount planted last year. This is a 77% to 115% increase compared to fiscal 2023. Over the next few years, a gradual adoption increase will occur, with a 25 percent market share goal by 2027. Double Team is one of the fastest growing seed traits on the market because of S&W's sorghum technology. Farmers are realizing the benefits of improved yield enhancement through grass control and crop grazing safety technologies. YTD margins were 29.2% compared to 23.2% last year. The advantages are evident with Double Team gross margins of ~ 60%. Further, SANW expects them to increase due to efficiency and stacking technologies. S&W is the key technology provider in sorghum.
Several initiatives were implemented to improve efficiency,
increase inventory utilization, reduce product SKUs, and cut outsourcing costs.
Further, a plan was introduced to reduce seed manufacturing costs and
rationalize certain low-margin forage product lines.
International operations face several headwinds, especially
in the Middle East, Northern Africa, and the MENA region. They've gotten worse
since February.
The Double Team technology platform by S&W Seed (SANW) improves profitability and productivity
for sorghum grain farmers. Sorghum requires
less water and energy than other crops like corn. The technology also helps
farmers optimize their use of resources, leading to better profitability.
S&W Seed Company adopted a brand and licensing strategy to expand. They have signed licensing agreements with 15 independent seed companies, some of which offer Double Team under private labels.
Mexico, Brazil, Argentina, and Australia are some of S&W Seed Company's key international markets. The company plans to work with market leaders in these regions through license agreements, allowing it to carry and promote Double Team while paying royalties.
Within three years, the Double Team quickly gained market acceptance, capturing 10% of the U.S. sorghum market. This rapid adoption rate shows how valuable and practical the technology is for sorghum farmers. SANW is also working on DT2, which allows earlier weed spraying during the sorghum growth cycle. They also work on DT and Prussic Acid-Free (PAF) traits for weed control and livestock safety.
For fiscal 2024, adjusted EBITDA expectations are negative $6 million to $8 million. Despite the negative EBITDA expectation, the payments from Shell and Trigall are expected to cover operating cash needs for 2024. SANW received a $6 million payment from Shell in February 2024 and will receive a $1.4 million payment from Trigall. Beyond fiscal 2024, if growth continues in its sorghum portfolio and it achieves expense management initiatives, it will soon be near positive cash flow.
The table below provides additional quantitative value analysis.
Tangible BV is .53 per share versus the market's current price of .32. P/TB = .60, EV/BV = 1.25, trading at historical lows. My enterprise value is calculated as market value + total liabilities less cash. EV/GP is 3.97, down from 13.73 for 06/2022. EV/Sales = .94, down from the 2021 value of 2.11. Debt per share is significant at 1.19 and slightly improved from 1.24 for 2023.
Properties owned: Warehouse ( Moore County, Texas); Processing facility/Warehouse (Lubbock County, Texas); Research farm (Keith, South Australia)
Opportunities:
The new CEO and CFO have deep operational experience managing seed businesses and introducing new traits.
Management expects Double Team to be on over 10% of U.S. sorghum acres. Plus, licensing and partnerships for international growth.
A successful launch and growth of Double Team, DT Forage Sorghum, and Prussic Acid Free.
Investing in R&D to develop new traits and focus on non-GMO solutions. From 12/2019 to the MRQ, 30.23 million or .81 per share was spent on research and development for new products.
Material improvement and quickly expanding margins with Double Team sorghum. Management is focused on high-margin products. Quarter 3 2024 saw a 25% margin improvement over Q3 2023, with GM% of 23.56% versus 18.77%.
Partnership with Shell to develop Camelina for biofuels and explore strategic partnerships to diversify revenue.
Removing noncore programs and selling nonessential assets.
Risk
Geopolitical events, such as contract losses in the MENA region and supply constraints in Australia, negatively affected revenue and EBITDA guidance.
Agriculture market conditions are unpredictable, and SANW lacks the liquidity to wait another two years. Working capital must be managed efficiently to cover operational needs and reduce liquidity risks. Material negative surprises will likely result in dilution or bankruptcy to pay debtors.
Conclusion:
S&W Seed has demonstrated impressive growth with Double Team and its future product pipeline. Strategic partnerships and focusing on high-margin products with low-cost partnerships and associated royalties offer value for investors willing to take on the risk.
Despite this, we cannot predict droughts, floods, geopolitical issues, or market acceptance of their current or future products. This, coupled with current debt, makes SANW a HIGH RISK investment.
However, given the current valuation and current and potential value of existing seed technology, I consider SANW a POSITIVE EXPECTED VALUE INVESTMENT. So, I'm buying SANW.
Long SANW (S&W Seed Company)
