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SANW: Third quarter results severely impacted by decline in sales in Saudi Arabia but other areas were better than expected

By Ian Gilson, PhD, CFA


Third quarter results were reported on May 10, 2017. Due to the impact of proposed regulation on water consumption by large companies revenue from Saudi Arabia declined from $3.4 million last year to almost nothing in the third quarter.
Gross margins increased, partially due to the fact that sales in the U.S.A. were a larger proportion of revenue than last year and these sales carry a better gross margin.
Operating expenses were slightly below our estimate as was the tax rate. Operating margins (before non-operating items) were 7.47% as compared to our estimate of 7.46%. Excluding the change in derivative warrant liabilities of a $1.01 million credit to income earnings on a fully diluted basis were $0.02 a share as compared to our estimate of $0.03.
S&W Seed (NASDAQ:SANW) changed its guidance to revenue in the range of $82 to $87 million and Adjusted EBITDA in the range of $5.7 and $7.1million. In our new model this equates to 4Q17 revenue of $26 million and an EPS of $0.04 a share.
During the conference call the CEO mentioned that there was a significant increase in interest in the Sudan and in Egypt in adding significant acreage and in buying seed and then exporting the alfalfa to Saudi Arabia. If S&W Seed can participate in this then orders would be placed in the 4Q17 for delivery in 1Q18 fiscal year.
The Australian crop has been impacted by cold weather and very heavy rain. It is estimated the yields could decline by as much as 50% from the average yield of the past few years. Growers will be buying inventory from prior years. This may increase prices next year unless there is a bumper crop.
The company expects to sell sorghum seed next fiscal year, its first harvest from April 2017 plantings. S&W Seed and Generic Genetics have agreed to develop alfalfa seed varieties containing selected biotechnology characteristics. Generic Genetics is headed by Dr. David Stalker, a renowned expert in biotech trait development. As certain technologies come off patent over the next few years Generic Genetics and S&W will develop specific products for S&W Seed. Dr.Stalker has been involved in the introduction of transgenic traits in soybean, canola and cotton. We do not expect this collaboration to have any material impact on revenue within the next few years. 


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