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Sinking Prospects: Cadiz, Inc. Faces Financial and Dilution Challenges

Summary:


  • Baoro Research is initiating coverage on Cadiz, Inc. with a "Sell" recommendation, setting a target price of $2.90 per share.

  • Cadiz, Inc. announced a direct offering of 7,000,000 shares at $3.34 per share, resulting in approximately 10% dilution for existing shareholders.

  • The Company plans to use proceeds to advance water supply projects and infrastructure. However, a historical median ROE analysis indicated a potential -84.77% return on proceeds, with a projected loss of $0.26 per share, highlighting a risk of value erosion for shareholders.


Catalyst:

On November 4, 2024, Cadiz, Inc (NASDAQ:CDZ), a California water solutions company, today announced that it has entered into a placement agent agreement for the purchase and sale of an aggregate 7,000,000 shares of its common stock in a registered direct offering at a price of $3.34 per share [1]. The Offering is expected to close on or about November 5, 2024, subject to the satisfaction of customary closing conditions [1].


The Company intends to use the net proceeds from the Offering to advance development of its water supply and groundwater banking project which may include acquisition of equipment and materials intended to be used in construction of facilities related to tis northern and /or southern pipeline projects which the Company expects to begin 2024 [1]. The proceeds will also be used for the equipment and materials related to wellfield infrastructure on land owned by it and its subsidiaries, business development activities, other capital expenditures, working capital, the expansion of business and acquisitions, and general corporate purposes [1].


Analytical Framework Outline


We establish a reference price of $3.50 as of November 1, 2024. This reference price serves as a benchmark, providing the starting point for our per-share impact analysis regarding the catalyst. The reference price is generally set at the latest closing price before the disclosure of the relevant development, reflecting the assumption that this price incorporates all public and private information available up to that date.


First, we assess the anticipated dilution impact on existing shareholders due to the new share issuance. This analysis relies on the reference share count provided in the latest quarterly filing. Subsequently, we review the Company’s historical return on equity (ROE) to evaluate the potential effectiveness of the proceeds in generating shareholder value. Our base-case analysis utilizes the historical median ROE percentage to provide a benchmark for this evaluation. Finally, we adjust the reference price to account for both the dilution impact and the projected value creation.


Dilution Analysis


According to the most recent quarterly filing, the Company reported 67,896,161 common shares outstanding [2]. The announcement of a public offering of an additional 7,000,000 shares results in an adjusted share count of 74,896,161 shares, representing approximately a 10% dilution for existing shareholders.


Return on Proceeds


In our base case estimate, we calculate a total return on equity (ROE) of -84.77% on the proceeds from the offering, corresponding to an estimated total loss of $19.8 million. This estimate is based on the Company’s historical median ROE across its publicly reported financial history. Taking into account the adjusted share count, this equates to a total loss per share of $0.26, as outlined below:


Putting It All Together


With a reference price of $3.50 per share, a 10% dilution adjustment yields an adjusted price estimate of $3.14. Factoring in the implied loss of $0.26 per share, the expected price estimate is $2.87 per share, representing a potential downside of -17.87% relative to CDZI’s current market price at the time of analysis.


Other Considerations

Financial Distress


An additional and noteworthy consideration is the indication of potential financial distress within the Company, as reflected by a significantly negative Altman Z-score, our preferred metric for assessing financial health. An Altman Z-score below 1.8 suggests a high likelihood of bankruptcy, whereas companies with scores above 3 are generally considered financially stable and unlikely to face bankruptcy risks [3].



Various ROE


In our base case, we assumed a constant ROE% based on the historical median ROE%, which we believe provides a reasonable starting point for analysis. However, it is important to consider the potential variability in ROE% and its consequent impact on the share price, as indicated by our model. To illustrate this, we include the data table below, which presents a range of implied price estimates generated by our model under different ROE% scenarios, reflecting the potential returns on equity proceeds from the announced public offering.


In conjunction with our analysis, we find that the current price of $3.48 per share, post-disclosure, presents a competitive entry point given our bearish outlook and the conclusions drawn from our assessment.


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