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Else Nutrition
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== Investment summary == === Company description: Plant-based, non-dairy formula === Else Nutrition is looking to disrupt the baby and toddler nutrition market with its minimally processed, plant-based, dairy-free, soy-free formula. Dairy and soy have been the only sources of protein in global infant formula for decades, resulting in difficulties for babies who are allergic or intolerant. Current hypoallergenic (dairy) alternatives often have a compromised taste, resulting in unhappy babies. Else’s organic and minimal-processing credentials also appeal to families seeking flexitarian lifestyles and more sustainable food choices. Else launched its toddler formula in August 2020 and has since rolled out to Amazon.com, a number of online retailers and 1,250 stores as of the end of Q122, with the plan to reach 4,000 stores by end 2022. In June 2021 it launched its kids nutritional drink line, and in April 2022 it added a baby and toddler cereal line. It has also developed an infant formula, which is undergoing clinical trials, opening up a substantial future market opportunity. Else is preparing to roll out its products in new geographies, with Canada being added in July and Western Europe and China during H222. === Valuation: DCF base case valuation of C$6.0/share === Edison values Else primarily on a DCF basis, as it effectively captures the potential growth of the business and can be flexed for different scenarios. Edison uses a 10-year standard DCF followed by a further 10-year ‘fade' or stabilisation period, before applying its terminal assumptions. Edison's model assumes a sales CAGR of 47% in years 4 to 10, followed by 15% in years 11–15 and 10% in years 16–20. Edison assumes 2.0% terminal growth and a 15% terminal EBIT margin. This results in a 12-month DCF value of C$6.0, which Edison flexes to C$10.4 under a bull case scenario. The current share price appears to be discounting significantly more bearish conditions than its slower roll-out scenario, discounting terminal growth of 0% and a WACC of 23%. Edison also looks at peer group analysis; although there are not many directly comparable peers, Else trades on an FY22 EV/sales of 6.6x versus a peer group of much more mature baby food and plant-based manufacturers on 3.0x. Edison expects Else’s growth to significantly outpace that of its peers, and hence believe Else’s current premium is justified. === Financials === Q1 revenues were C$1.6m, up 26% versus the previous quarter, including a 40% increase in sales on Amazon.com. Management is expecting a material acceleration in Q2, and Edison forecasts full year sales of C$13.6m (management’s ambition is to build sales into the hundreds of millions over the next five years). Else is currently loss making, as it is investing in its infrastructure to develop its business and build scale. Edison notes the business is well funded, with a net cash position of C$18.6m at end March 2022 (excluding C$1.2m of restricted cash). === Sensitivities === Else operates in the fast-moving consumer goods (FMCG) space, so important factors are input costs and branding. Reputational risk is particularly high in the infant nutrition space, and regulatory barriers are higher as the segment is highly regulated globally. Else is exposed to supply chain risks as it uses contract manufacturers for production. As a disruptor to the market, it will need to establish its brand credentials in a space that is dominated by many well-established much larger brands. There is execution risk as it scales up, both in the US and as it expands to new markets, and the business will require further equity or debt to support the high growth.
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