Editing Else Nutrition (section)

=== Forecasts ===
Edison details its key forecast assumptions below:

* In revenue terms, Edison splits the business into online and in-store retail. Edison believes the online side made up c 75% of the business during FY21 and would expect this to continue to account for a significant proportion of the business. As of the end of April 2022, Else products were sold in 1,250 stores in the United States and management expects to reach 4,000 stores by year-end. As the business expands into more major retailers, the number of store additions should accelerate and management expects to be selling its products in more than 20,000 stores by 2025. Edison also expects the online side to continue its expansion as Else uses online platforms such as Amazon.com to enter new markets before listing in physical stores. Else’s quarterly results show Else is mostly growing revenues sequentially in the double digits per quarter, though Q421 revenues were up 8% sequentially (ie on Q321).
* Edison expects business growth to continue to accelerate in FY22 as it rolls out to Canada, China and a few European markets. Edison forecasts a CAGR of 111% between FY22 and FY24, in line with management expectations, and for growth to remain at high levels until FY26, as Edison expects Else’s infant formula to be launched by FY25, thus providing a further boost in revenues as it is rolled out. As discussed in the valuation section, Edison then assumes a revenue CAGR of 47% in years four to 10 (FY25–31), followed by a deceleration to 15% per year in years 11–15, and then 10% per year in years 16–20.
* From a profitability perspective, Edison expects gross margins to be higher in the online business than the in-store business. Edison models gross margins for the group overall of 19% in FY22, growing to 30% by FY24. In the longer term, as the business scales up, Edison believes gross margins could eventually reach over 50%, which is the industry norm, although this would largely depend on how much manufacturing is brought in-house and its efficiency.
* While operating profits are difficult to forecast given that the company is still loss making and there are many variables, Edison expects losses to slowly narrow and for operating profit to turn positive by FY25. Edison forecasts operating margins to reach 15% by FY27 and then to remain flat thereafter, as the business prioritises revenue growth.
* Edison forecasts a tax rate of 30% once the company turns profitable (which Edison expects to be in FY26) and cash tax to be payable from FY27.

Turning to cash flow, Edison highlights the following:

* Edison assumes high working capital requirements in the near term as new products are rolled out and new stores and distributors are added. As the business expands, Edison expects an improvement in working capital as a percentage of sales. Edison forecasts 15% of sales by FY27 and 10% of sales by FY32, with the latter being fairly standard in the food manufacturing industry.
* Although CMOs are used for manufacturing, Edison expects capital expenditure to remain high for some time as capital is invested at the CMOs as the business expands. Edison assumes capex is 10% of sales until FY27, then reduces to 5% by FY32. Edison forecasts capex at 3% of sales in perpetuity, in line with other food manufacturers and FMCG companies.
* Edison assumes capex runs at 1.5x depreciation in the earlier years and tapers down to 1.1x depreciation as capital expenditure slows down.
* Edison forecasts net cash of C$5.0m at end FY22 (vs $23m at end FY21), and net debt of C$16.5m at end FY23, though Edison recognises there may be more fund-raising activity before end FY23, which is not in its forecasts.