Restaurant Co. In Transition With Strong Pivot to Agri-Foods

May 24, 2023 (Investorideas.com Newswire) Food service is a fickle industry, as fad diets and other social swings can quickly dictate new consumer behavior. One industry player is recognizing this reality and looking to evolve from its restaurant-based offerings.

Muscle Maker Inc. (GRIL:NASDAQ) is a multi-market global food company with segments that include Muscle Maker Grill, Pokemoto Hawaiian Poke Restaurant, SuperFit Foods Meal Prep, and Sadot Agri Foods.

Muscle Maker began by developing a strong foothold in the fast-casual restaurant space. The company's Muscle Maker Grill Restaurant arm consists of fast-casual locations offering various protein-based meals, while the Pokemoto Hawaiian Poke Restaurant group offers storefront franchise solutions specializing in Hawaiian-inspired poke bowls, wraps, and salads. The SuperFit Foods Meal Prep segment operates as a centralized kitchen that prepares meals for direct distribution to consumers.

Finally, the Sadot segment is focused on international Agri-food commodity shipping, farming, sourcing, and producing key ingredients, such as soy meal, corn, wheat, and food oils. Some 50+ company-owned and franchised restaurants are currently in operation, creating one of the world's first vertically integrated food companies.

US$8.5 Million Purchase

Yesterday morning, Muscle Maker announced it had purchased developed Zambia farmland for US$8.5 million. This agreement granted Muscle Maker's subsidiary Sadot 4,942 acres (2000 hectares) of agricultural land, including building and relative assets within the Mkushi Farm Block of Zambia's Region II agricultural zone.

This purchase expands Sadot's position as an international agri-foods company.

Michael Roper, CEO of Muscle Maker Inc. (MMI), stated, "Upon closing of the purchase of the Mkushi Farm, it is expected to continue to diversify MMI's holdings within the world's food and feed supply chain . . . We expect the purchase to help accelerate Sadot's growth within the agri-commodity space. The addition of Sadot to the MMI portfolio has been the key driver behind our recent growth. We have taken several successful steps in our shift to diversify our U.S.-centric restaurant business toward a more globally focused-food organization. The Farm acquisition, when closed, is expected to further accelerate our growth as a diversified holding company and to provide MMI shareholders exposure to our enhanced and expanding portfolio."

The Catalyst: Shifting to a More Globally Focused Food Org.

On March 31, the company announced positive Q1 2023 results. "We are pleased to report that Muscle Maker had a successful first quarter of the year, marked by a significant move toward becoming a diversified global food organization," said CEO Michael Roper at the time, reflecting on the quarter's revenue of US$213 million, US$210 million more than revenue booked during the same period in 2022.

"This transformation was made possible by the creation of our wholly owned subsidiary, Sadot LLC," Roper explained. "Our shift to diversify our U.S.-centric restaurant business towards a more globally focused food organization is proving out by the progress we have made thus far is encouraging, and we are confident that we are on the right path to realizing our vision for a more diversified and successful future."

Why This Sector? More Profit, Less Overhead

If you look at the reported numbers, it's easy to see why the company is seeking to transition out of the retail restaurant space and push itself further into the wholesale space.

The company's non-GAAP adjusted EBITDA from operations was US$2.4 million in the first quarter of 2023, compared to a US$1.5 million loss in the first quarter of 2022. Looking closer at the segmentation, one will find that the Sadot subsidiary generated a net income of US$4.3 million, while the MMI Restaurant Brands subsidiary generated a net loss of US$406,000 over the same period.

Writing for Investopedia, analyst Nathan Reiff explains that "food companies tend to be a fairly effective hedge against inflation because they are often able to pass some of the additional costs associated with an inflationary climate along to consumers."

Why This Company? Building the Back End

As an April 25 report from Alliance Global Partners explains, "In November 2022, GRIL formed a subsidiary, Sadot, as the company entered the agribusiness, expanding beyond its legacy restaurant business. GRIL aims to build out a farm-to-table business, benefiting from the stable agriculture business that supports the growing global population. While still in the early days, Sadot has generated sales above US$50M in each full month since inception, including US$90M+ revenue in two of those months."

Muscle Maker's Sadot subsidiary completed 19 transactions across 11 different countries in Q1, with an average revenue per transaction of US$11.1 million and an average COGS per transaction of US$10.8 million.

Meanwhile, the consumer-facing restaurant arms currently operate some 50+ units across two fast-casual concepts, as well as subscription-based fresh meal prep service with 30+ points of distribution in addition to national in-home and institutional delivery.

An additional 45+ Pokemoto franchise agreements have been sold but have not yet opened. The company has also launched a new dual-concept unit that combines the Pokemoto and Muscle Maker Grill concepts as two consumer options under the same roof.

Why Now? Get In Before the Transition

Despite the rapid growth of its retail brands, management sees the greatest future potential in back-end services. As of March 31, 2023, Muscle Maker had a cash balance of US$6.4 million, as well as over US$4 million in receivables due in the next 60 days, meaning it's currently liquid enough to undertake division-wide sales and reap maximum profit without having to seek outside financing.

"We are extremely pleased with MMI's performance this quarter - fueled by our new diversification strategy," says Roper. "Investors may notice a growing disparity in the operating results between the two business units, and management is committed to focusing our resources on the path that will create the most value for shareholders going forward."

"We are confident in the future of both Sadot in the global supply chain and our restaurant group as its downstream retail vertical, and we look forward to continued growth in the months and years to come."

On May 10, analyst Clive Maund opined, "Fundamentally, there are plenty of reasons for Muscle Maker's stock to continue to advance. For a start, it is buying back its stock, but most importantly, the company is swinging from making losses to moving strongly into the black with very strong revenue and profit projections for this year and especially for 2024."

"It reported revenue of US$93.8 million for the month of March this year, and check out this new research report from Goldman Small Cap Research (nothing to do with Goldman Sachs). Goldman has a 6 to 9-month target for the stock at US$4.50, which our charts certainly indicate is well within the realms of possibility," Maund wrote.

Ownership and Share Structure

According to Reuters, as of May 23, 8.43% of Muscle Maker's stock is held by management and insiders. Director Paul L. Menchik has 0.37%, with 0.12 million shares. Director Jeff Carl has 0.26%, with 0.08 million. Director Stephan A. Spanos has 0.25%, with 0.08 million, and Major Malcolm Frost has 0.23%, with 0.07 million. Other insider owners include Southall Alfred BIII Southall , Phillip Balatsos, Kevin James Mohan, and Michael John Roper.

15.40% is with strategic investors. AGGIA LLC FZ has 8.85%, with 2.85 million shares.

5.69% is with institutions. Catalytic Holdings LLC has 3.51%, with 1.13 million shares. Thoroughbred Diagnostics' has 3.04%, with 0.98 million, and Joey Giamichael of Thoroughbred Diagnostics has 5.04%, with 1.62 million. The Vangaurd Group Inc. has 1.67%, with 0.54 million. Geode Capital Management LLC has 0.99%, with 0.32 million. BNY Mellon Asset Management has 0.53%, with 0.17 million, and Citadel Advisors LLC has 0.51%, with 0.16 million.

Other institutional investors include Walleye Capital, Northern Trust, and Virtu Americas LLC.

The rest is in retail.

Muscle Maker Inc. has a market cap of US$37 million with 32.2 million shares outstanding.

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