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Else Nutrition
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== Valuation == Edison's primary valuation methodology is discounted cash flow (DCF), as it effectively captures the potential growth of the business and it can be flexed to illustrate the sensitivity to Edison's assumptions. As Else is loss making, yet growing at a fast pace, Edison uses a 10-year DCF followed by a further 10-year ‘fade’ or stabilisation period, before applying its terminal assumptions. Edison also looks at peer group analysis, although Edison recognises there are few directly comparable peers. Edison outlines its key DCF assumptions: * A revenue CAGR of 47% in years four to 10 (FY25–31), as the business rolls out across new store chains and across geographies and widens the product range. Edison assumes revenue growth slows to 15% per year in years 11–15, and then 10% per year in years 16–20. * EBIT margins reach 15% by FY27 and remain flat thereafter, as the business prioritises revenue growth. To put this in context, operating margins in the baby food space are typically around the mid-to-high teens, depending on scale and geographical and product mix. * An initial capex requirement of 10% of revenues, as the business builds scale. Edison assumes this falls to 8% of sales in year seven and it falls further to 5% of sales in year 11. This is high compared to food manufacturing standards, where capex is typically 3% of sales. * Capex/depreciation of c 1.1x from year 10 onwards. This is likely to be lumpy and fluctuate, but in the long term Edison would expect it to stabilise around 1.1x. * A steady working capital outflow over time as the business grows. Working capital is currently high as manufacturing is done in short runs and the business needs enough working capital to serve new customers. Edison therefore expects the absolute level of working capital to increase, but Edison also forecasts working capital/sales to slowly decline. Edison forecasts a level of 27% in FY22, falling to 20% by year four and 10% by year 11 (FY32), which would be in line with the higher end of the food manufacturing sector. As discussed above, Edison notes that the FY21 financial statements contained a key audit matter relating to the size of the inventory. * Ongoing effective cash tax rate of 30% from year eight (FY29) onwards. Edison expects no tax to be paid while the company is loss making then as tax losses are used up, the tax rate is likely to climb fairly rapidly. * Terminal growth of 2.0%, in line with the rest of the consumer space. * Edison's WACC of 12.5% is predicated on a risk-free rate of 5.0%, an equity risk premium of 5% and a beta of 1.5. * Net reported cash of C$23m at end FY21. * For its base case scenario, Edison uses the current diluted number of shares in issue, 107.6m. Edison notes there is a significant number of options and warrants in issue that are out of the money, although there are 3m warrants that are currently in the money and hence Edison has diluted the number of shares to reflect this. Edison's DCF valuation, with the assumptions detailed above, leads to a base case value of C$6.0/share. Edison illustrates how its DCF valuation is sensitive to flexing the cost of capital and terminal growth rate in Exhibit 2 and the terminal growth rate and the terminal EBIT margin in Exhibit 3. {| class="wikitable" |+Exhibit 2: DCF sensitivity to WACC and terminal growth rate (C$/share)<ref name=":0">Source: Edison Investment Research.</ref> ! ! ! colspan="5" |Terminal growth |- ! ! !1.0% !1.5% !2.0% !2.5% !3.0% |- ! rowspan="8" |WACC !14.0% |4.4 |4.5 |4.6 |4.7 |4.8 |- !13.5% |4.8 |4.9 |5.0 |5.1 |5.2 |- !13.0% |5.3 |5.4 |5.5 |5.6 |5.7 |- !12.5% |5.7 |5.9 |6.0 |6.2 |6.3 |- !12.0% |6.3 |6.4 |6.6 |6.8 |7.0 |- !11.5% |6.9 |7.1 |7.3 |7.5 |7.7 |- !11.0% |7.6 |7.8 |8.0 |8.3 |8.6 |- !10.5% |8.4 |8.6 |8.9 |9.2 |9.6 |} {| class="wikitable" |+Exhibit 3: DCF sensitivity to terminal growth rate and EBIT margin (C$/share)<ref name=":0" /> ! ! ! colspan="5" |EBIT margin |- ! ! !13.0% !14.0% !15.0% !16.0% !17.0% |- ! rowspan="7" |Terminal growth !1.0% |5.4 |5.6 |5.8 |5.9 |6.1 |- !1.5% |5.5 |5.7 |5.9 |6.1 |6.2 |- !2.0% |5.6 |5.8 |6.0 |6.2 |6.4 |- !2.5% |5.8 |6.0 |6.2 |6.4 |6.6 |- !3.0% |5.9 |6.1 |6.3 |6.5 |6.8 |- !3.5% |6.1 |6.3 |6.5 |6.7 |7.0 |- !4.0% |6.2 |6.5 |6.7 |7.0 |7.2 |} Edison now flexes its DCF assumptions to consider a number of scenarios, given the inherent uncertainty in how Else’s growth curve will develop. === Faster and slower roll-out scenarios === In terms of presence in physical stores, Else’s products are currently sold in smaller and more niche grocers that tend to have a greater focus on natural products and healthier eating. Under its faster roll-out scenario, Edison assumes there is a big win in terms of obtaining an in-store listing at a major US retailer, which leads to a successful roll-out across other US major retailers and subsequent successful expansion to other geographies. Edison notes that Else started selling its products on Walmart.com and Kroger.com in January 2022, which could pave the way for an expansion into physical stores. Successful listing in-store at a major US retailer would lead to increased sales per store, as the major retailers tend to have a wider reach, thus enhancing the target market. Edison accounts for the increased cash flow requirements to support the faster growth. Edison also assumes the infant milk formula product is more successful than in its base case scenario, thus driving faster growth from FY27. Edison assumes EBIT margins do not benefit from the greater scale and faster growth as Edison expects management would choose to reinvest in the business to continue to drive growth. Under the slower roll-out scenario, Edison assumes uptake of the product is somewhat slower than its central assumption. Edison assumes Else products are only listed in niche retailers and health stores and it therefore continues to grow, but at a much slower pace, as it struggles to expand beyond this in terms of physical store presence. The products gain less traction with consumers and hence remain restricted to a more niche audience of babies with severe intolerances, rather than expanding also to picky eaters and families looking to adopt a flexitarian diet. Edison still assumes the infant milk formula is launched, though Edison assumes a two-year delay and hence assume this does not occur until FY27. Again, Edison accounts for the impact of the slower growth on the cash flow. Edison illustrates its revenue assumptions under each scenario in Exhibit 4. '''Exhibit 4: Revenue assumptions under various scenarios<ref name=":0" />''' [[File:Revenue assumptions under various scenarios.png|600x600px]] Edison now consider the valuation implications of the scenarios it has examined. Under the faster roll-out scenario, its DCF value rises to C$10.4. Edison illustrates the sensitivity to WACC and terminal growth under this scenario in Exhibit 5. Even if we apply a WACC of 14.0% to reflect higher risk, Edison's fair value reduces to C$8.0, which is still materially above the current share price (C$1.16). Separately, Edison notes there is a significant number of options and warrants in issue (13m options and 46m warrants), many of which have demanding performance conditions attached. A large portion of warrants (32m) was issued in 2019 and will vest in stages on the business reaching certain milestones by June 2025. These include generating C$60m in revenues in a consecutive 12-month period and FDA or equivalent regulatory approval permitting marketing and sale of Else’s plant-based infant milk formula. The options and warrants have varying strike prices, between $0.0001 (for the performance warrants) and C$4.04. {| class="wikitable" |+Exhibit 5: Faster roll-out scenario DCF sensitivity to WACC and terminal growth rate (C$/share)<ref name=":0" /> ! ! ! colspan="5" |Terminal growth |- ! ! !1.0% !1.5% !2.0% !2.5% !3.0% |- ! rowspan="8" |WACC !14.0% |7.8 |7.9 |8.0 |8.2 |8.3 |- !13.5% |8.4 |8.6 |8.7 |8.9 |9.1 |- !13.0% |9.2 |9.3 |9.5 |9.7 |10.0 |- !12.5% |10.0 |10.2 |10.4 |10.7 |10.9 |- !12.0% |10.9 |11.2 |11.4 |11.7 |12.1 |- !11.5% |12.0 |12.3 |12.5 |12.9 |13.3 |- !11.0% |13.1 |13.5 |13.8 |14.3 |14.8 |- !10.5% |14.5 |14.9 |15.3 |15.9 |16.5 |} Under the slower roll-out scenario, its DCF value falls to C$4.2. Edison illustrates the sensitivity to WACC and terminal growth under this scenario in Exhibit 6. Importantly, the current share price appears to be discounting significantly more bearish conditions than its slower roll-out scenario, and is discounting a terminal growth of 0% and a WACC of 23%. {| class="wikitable" |+Exhibit 6: Slower roll-out scenario DCF sensitivity to WACC and terminal growth rate (C$/share)<ref name=":0" /> ! ! ! colspan="5" |Terminal growth |- ! ! !1.0% !1.5% !2.0% !2.5% !3.0% |- ! rowspan="8" |WACC !14.0% |3.1 |3.1 |3.2 |3.2 |3.3 |- !13.5% |3.3 |3.4 |3.5 |3.5 |3.6 |- !13.0% |3.7 |3.7 |3.8 |3.9 |4.0 |- !12.5% |4.0 |4.1 |4.2 |4.3 |4.4 |- !12.0% |4.4 |4.5 |4.6 |4.7 |4.8 |- !11.5% |4.8 |4.9 |5.0 |5.2 |5.4 |- !11.0% |5.3 |5.4 |5.6 |5.8 |6.0 |- !10.5% |5.8 |6.0 |6.2 |6.4 |6.7 |}
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