AllianceGlobal Partners initiated coverage on Muscle Maker Inc. (GRIL:NASDAQ) with a Buy rating and a $2.40 per share price target after the company entered the agribusiness, a move already reaping benefits, reported analyst Aaron Grey in an April 25 initiation note. Muscle Maker is now well-positioned for revenue growth and cash flow.
The expansion into a new area "transformed Muscle Maker from a restaurant business with a slow build via franchise expansion to a business model with high revenues and profits (even if at a low margin)," Grey explained. "[The company] went from burning cash and a negative EBITDA to generating positive EBITDA and operating cash flow in Q4/22."
Attractive investing opportunity
Grey noted AllianceGlobal is currently trading at about $1.34 per share. The difference between this and the $2.40 per share target prices implies a 79% return for investors.
"We see the risk-reward as attractive at this entry point," added Grey.
Business picture pre-transformation
The original business of the Texas-based entity, which went public in 2020, was company- and franchise-owned restaurants offering and selling fast casual food. In 2021 Muscle Maker acquired SuperFit Foods, a direct-to-consumer premade meal prep business, and added restaurant brand, Pokemoto.
Until late last year, Muscle Maker's business model was selling food to customers via these three entities.
Two significant changes
Muscle Maker's big move consisted of two connected parts and occurred in November 2022. One was complementing its legacy restaurant business by entering the agribusiness with the formation of a subsidiary named Sadot in November 2022. Sadot is a U.S.-based food supply chain company that moves grains, wheat, soybeans and other food products worldwide via international commodity shipping and trading transactions.
The second component was Muscle Maker entering a partnership agreement with the international consulting firm, AGGIA, for it to manage Sadot's day-to-day operations.
With Sadot, Muscle Maker aims to develop out a farm-to-table business, "benefiting off of the stable agriculture business that supports the growing global population," noted Grey.
Already reaping rewards
Immediately, Sadot was profitable, Grey highlighted. In each full month since its launch, the subsidiary generated more than $50 million ($50M) of revenue. In two of those months, sales exceeded $90M.
Grey pointed out that the margins with Sadot are lower, at 3%, than with its food direct-to-consumers line of business. However, Sadot's are comparable to those of large companies in the sector, which are 5–6%, given the differences between the smaller entity and its bigger peers.
A look at cash
Grey reported that Muscle Maker yielded its first positive free cash flow (FCF) in Q4/22 of $3.2M, and FCF is expected to increase going forward.
At quarter's end, the company had $10M in cash and cash equivalents and $1M in outstanding debt.
Looking to the future
Grey discussed what Echelon expects for Sadot in the near and longer term.
Going forward, Sadot will to be the primary sales and EBITDA generator for Muscle Maker and, wrote Grey, "provide the primary upside to the stock."
Sadot's monthly revenues through the rest of 2023, according to conservative Echelon estimates, will average $60M and in 2024, increase to $75M.
In the near term, Sadot intends to stay focused on the trade business of commodities like food oils, wheat, soy and corn.
Over the longer term, the subsidiary aims to expand into other areas in the global food supply chain, such as owning farms, processing crops or providing financing, noted Echelon. Already, Sadot put a deposit down on some undeveloped African farmland, on which it plans to grow crops.
"We look for Sadot to still be able to build out its agribusiness even if the sector is coming into a downcycle," wrote Grey.
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Disclosures for Alliance Global Partners, Muscle Maker Inc., April 25, 2023
"Firm" used in the this section of the report entitled "Disclosures" refers to A.G.P. / Alliance Global Partners or Euro Pacific Capital, a division of A.G.P. / Alliance Global Partners. The Firm expects to receive or intends to seek compensation for investment banking services from all companies under research coverage within the next three months. The Firm or its officers, employees or affiliates, other than the research analyst authoring this report and his/her supervisor, may execute transactions in securities mentioned in this report that may not be consistent with the report’s conclusions. Sources referenced in this report: The information and statistics in this report have been obtained from sources we believe are reliable but we do not warrant their accurance or completeness. Regulation Analyst Certification ("Reg AC") — The views expressed in this report (which include the actual rating assigned to the company as well as the analytical substance and tone of the report) accurately reflect the personal views of the analyst(s) covering the subject securities. An analyst's sector is the universe of companies for which the analyst provides research coverage. Accordingly, the rating assigned to a particular stock represents solely the analyst's view of how that stock will perform over the next 12 months relative to the analyst's sector average. Furthermore, in accordance with FINRA Rules 2711, 2241, and their amendments related to disclosure of conflicts of interest, the analyst preparing this report certifies: • The analyst or member of the analyst's household does not have a financial interest in the company that is the subject of this report, including a position in the debt or equity of the company, without limitation, whether it consists of any option, right, warrant, future, long or short position. • The analyst or member of the analyst's household does not serve as officer, director or advisory board member of the company that is the subject of this report. • The analyst has not received any compensation from the subject company or from investment banking revenues, directly or indirectly, for preparing this report. • The report discloses all material conflicts of interest related to the analyst, the member firm, and the subject company that are known at the time of publishing this report.
