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Else Nutrition Holdings (OTCQX: BABYF) [TSX: BABY] offers the world’s only plant-based, non-dairy, non-soy nutrition. In previous articles, (1,2,3), I discussed why I have been bullish about this stock as there is a need for Else’s products and I am impressed with how quickly the company is penetrating its addressable market. The stock price hasn’t performed well since I initiated coverage, although Else has been making significant progress. The company experienced some delays in executing its plans due to the pandemic, similar to most other companies, but l estimate that the company will record a $10 million run rate this year and $25 million next year, compared to zero two years ago. These estimates assume no further delays from unforeseen events such as a pandemic or supply chain issues. In my view, this is a significant accomplishment. (All dollar figures in this article are in U.S. denomination)
Else is now expanding into being a global company developing a tremendous sales channel and establishing its brand with a portfolio of products. The progress made is enough to keep me feeling bullish about Else’s future stock price. and there’s a huge kicker as the company’s future flagship product gets closer to clearing the regulatory process.
International expansion
The company just entered the Canadian market, commencing sales through Amazon.ca, and also added a partnership agreement with Gourmet Trading Co. for distribution to 5,000 Canadian brick-and-mortar locations.
Management has been working to establish sales in China for over a year. The kickoff date hasn’t yet been disclosed. I suspect it will be within a month. There is already a distribution agreement with Bouzun, a leading Chinese online retailer. China not only offers the world’s largest market but there’s a huge opportunity there as almost all Chinese people suffer from lactose intolerance. From an article that appeared in Food Magazine:
Although there are no official figures, studies have indicated that lactose intolerance affects around 30% of Chinese children, and a study of Chinese adults showed that 92.3% suffered from some level of lactose mal-absorption. Despite this there is a huge push to encourage Chinese people to drink more milk. It is advertised as important for good health, the government funds milk-rounds to schools and the state-run television has aired programmes on the benefits of milk drinking. Many of the world’s top dairy companies have entered China as a result of seeing the huge potential market of 1.3 billion inhabitants – though many of these companies find it hard to find reliable and hygienic supplies of raw milk in China itself.
Management has targeted expanding into Western Europe before the end of this year with expectations that its product will be well received. CEO Hamutal Yitzhak said at the Q2 earnings call:
The population in Western Europe is roughly 300 million, similar to the size of the U.S. However, research and polling has shown that Europeans are even more conscious of healthy eating habits.
In addition to supporting its products in the U.S. with preclinical and clinical studies, Else has had social media marketing programs, ads in medical journals a dedicated team to work with pediatricians in providing product information and samples for their patients. Else will incrementally increase its marketing campaign in each of the new territories it is entering.
Sales channel and product expansion
Else began sales in the U.S. in September 2020 with sales only online through its own website and through Amazon. The company added distribution agreements with two of the largest distributors KeHe Distributors and UNFI (United Natural Foods) and now has sales at over 3000 brick-and-mortar stores in the U.S. Else has also added other online platforms such as Walmart.com and Kroger.com. Online sales at these sites will naturally translate to shelf space at same-store brick-and-mortar locations.
The company’s sales channel expansion plan has been well crafted. First, establish sales through an online presence and attract other online retailers. Then establish successful sales through a small chain and attract bigger chain stores while building a brand by offering a portfolio of products. The company initially began selling just one product for toddlers in 2020, added a kids powder mix in 2021, and subsequently added Toddler Omega and Super Cereal. Else plans to expand to offer 10 products with 20 SKUs this year. by the end of the year.
Key developments to watch
I expected the introduction of Else’s Super Cereal, the world’s first cereal to be certified free of toxins and heavy metals. Else management believes that the public, in general, has a perception that cereal is unhealthy and isn’t aware that now there is a healthy choice. It is true that cereal sales have been declining. The company is planning to promote the cereal through samples at pediatric centers and retail outlets and through an advertising campaign.
More than half of American infants participate in the Women with Infant Children (“WIC”) program. The program is funded by the federal government but administered by each individual state. Else has been working to gain WIC eligibility for its products. I learned from a recent conversation with Else management that the company is close to finalizing eligibility approval in a few states. WIC informs food retailers within its state once eligibility is granted. Since Else offers one-of-a-kind products, retailers in these states who aren’t already on Else’s distribution list will be eager to add Else products to their shelves. Else will probably pursue qualifying for the milk subsidy programs in China.
The company has begun working with medical distributors and food distributors to penetrate the hospital and educational outlets. Else is a natural for kindergarten through high school students who are lactose intolerant or obese and serve as a healthier alternative to milk or juice.
Revenue growth
Reported revenues for Q2 2022 were $2.3 million, 44% higher than for Q1 2022 and more than double the $0.9 million reported for Q2 2021. Sales through Amazon have topped $1 million with Q2 2022 reported revenue 84% higher than the previous quarter.
Sales for this year could reach $10 million by my estimate growing from 0 just two years ago. I estimate that with the territorial and new product expansion, next year’s sales should be in the $25 million range. Then it gets really interesting. FDA approval for Else’s infant formula is expected in early 2024 (as discussed below). This would be the first non-soy, non-dairy, plant-based food with a nutritional value equivalent to mother’s mile. Lots of things could stall the timeline or worst case scenario is that FDA approval isn’t granted, so I will leave 2024 and later revenue estimates for a later date.
Share info and valuation
There are 113 million shares outstanding with insiders owning about 27%. The company last reported $22 million in cash and no debt. The market cap is $63 million and the EV is $41 million. The company has sufficient funds to maintain operations for the next 12 months. The shares are trading at 4X my forward revenue estimate, which is expensive on the surface, but early commercial stage, high-growth stocks are always difficult to justify under traditional valuation metrics.
I prefer to use P/S for companies that aren’t yet profitable and look out two or three years forward. Else has the potential to grow to $100 million in revenue in 2024 and billions going forward if it can bring the only non-soy, non-dairy, plant-based, nutritional equivalent to mother’s mile food to market.
Pre-clinical, clinical and FDA
Else is providing medical proof to support its products are effective in improving gastric symptoms, support weight gain in infants and have nutritional value to promote healthy growth. The company completed its first preclinical study late in 2021 which demonstrated that Else infant formula demonstrated growth at least equivalent to dairy-based infant formula. A second preclinical study demonstrated the quality of the infant formula protein. Both of these preclinical trials are being used as first steps to meet the FDA requirements for Else’s infant formula.
Else has begun the next steps in the FDA requirement with its first clinical study to demonstrate the tolerance of its products and shortly will begin its second clinical trial to demonstrate healthy growth in the healthy toddler population.
The company expects to conclude FDA trials in 2023 with an FDA decision expected in early 2024.
Risks
The company has enjoyed early success in introducing its product but has yet to establish that the success is not just an early fad. The company is entering new territories where it will need to develop a new customer appetite for its products.
Else has been funding its growth by issuing shares. The company will likely need to do a capital raise within a year which will be dilutive to shareholders. It’s important to keep an eye on this dilution as there is a risk that the continuation of this strategy will place the company in a position where profitability will not become possible. At this point, as the company has established sales, it is important for investors to monitor going forward that revenue is growing at a faster pace than share count dilution.
Conclusion
In two years Else has grown revenues to what I expect will be about $10 million for this year with growth to accelerate as the company expands into a global presence and adds additional products. FDA approval for its anticipated flagship product is less than two years away. The company is providing game-changing products in the U.S. right now and is about to expand globally while it establishes its brand with a portfolio of product offerings. Else has the potential to be a billion-dollar revenue company in the not-too-distant future and commands a lofty valuation for investors seeking to get in early.
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