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An attractively priced play in fast-growing global meat alternatives market

Monde Nissin Corp. will soon be debuting on the Philippine Stock Exchange.

Based on its prospectus, Monde seems to be a good company with above average potential of becoming a good stock.

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Among the reasons why I like Monde are its market leadership position in several domestic shelf-stable food products and its resilience to the COVID-19 pandemic.

Monde manufactures and distributes well-loved food brands in the Philippines including Lucky Me!, SkyFlakes and Fita. The three brands are market leaders, with Lucky Me! boasting of a 68-percent market share in the instant noodles segment and SkyFlakes and Fita accounting for 47 percent of the savory biscuits market.

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In 2020, noodles and biscuits accounted for the bulk of Monde’s sales in the Philippines at 81 percent. While sales of biscuits were weak, sales of noodles were strong, increasing by double-digit despite the COVID-19 pandemic. This, together with the strong demand for its other products, allowed sales of Monde’s Asia-Pacific branded food and beverage business to grow by 5.3 percent to P53 billion last year after rising by 3.9 percent in 2019.

I like Monde also because of its exposure to the fast-growing global meat alternatives market through Quorn Foods. In 2020, the meat alternative business accounted for 22 percent of the company’s sales and 12 percent of operating profits.

Market trends

Demand for meat alternatives is growing rapidly due to several factors including the increasing awareness and concern for the environment and the growing popularity of healthier lifestyles. For example, according to IRI Data estimates, the meat-free grocery market in the United Kingdom posted a 32-percent CAGR (compound annual growth rate) from 2017 to 2020 while the frozen and refrigerated alternative meat multioutlet market in the US registered a 26 percent CAGR during the same period.

Notwithstanding the rapid growth in the past few years, Barclays Global Food estimates that the global meat alternatives market can sustain a 37-percent CAGR from $8 billion in 2020 to $140 billion by 2029. Note that in the United States, the share of alternative meats to the total meat market (including animal-based meat) was only 1 percent in 2019. In contrast, plant-based milk accounted for 14 percent of the total milk market (include animal-based milk) during the same period as consumers shifted from animal-based milk to plant-based milk.

Wholly owned Quorn

Quorn Foods, which is wholly owned by Monde is the market leader in alternative meat in the United Kingdom with a 28-percent market share. Its market share is more than double the size of the second largest player, Linda McCartney, at 11 percent. Quorn has a strong presence in the food service industry, being served in about 70 percent of all schools in the United Kingdom and available in about 4,500 pubs. It also supplies the greatest number of food service chains in the United Kingdom with alternative meat offerings, supplying nine out of the top 50 and four of the top 10 chains. Restaurants that serve Quorn’s alternative meat products include KFC, Greggs, Costa and Pizza Hut.

Although there are other meat alternative players such as Beyond Meat, most are still in the red. In 2020, Beyond Meat posted a net loss of $46 million on $407 million in revenue. In contrast, Monde’s meat alternative business led by Quorn generated $310 million in revenue and about $33 million in operating profit.

Finally, Monde’s initial public offering price is attractive. At P13.50 per share, MONDE is valued at 26.5X 2021 P/E based on our back of the envelope computations. Although this is slightly higher than URC’s current 2021 P/E of 24.5X and the local consumer sector’s average of 21X, the premium is well-deserved in my opinion given the strong growth potential of Quorn Foods.

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Good IPO price

Moreover, Monde will be debuting with a market capitalization of P242 billion, which is a significant discount compared to Beyond Meat’s current market capitalization of $6.6 billion or P320 billion. This is notwithstanding the fact that Quorn and Beyond Meat have similar level of sales and that Quorn is already profitable while Beyond Meat is not. Impossible Foods, which is another pure play on meat alternatives, is planning to list on the New York Stock Exchange soon, with a market capitalization of $10 billion or almost P500 billion. Given the valuations of other meat alternative plays, investors are only paying for Monde’s meat alternatives business. Its Asia-Pacific branded food and beverage business, which generated P11.5 billion in operating profit last year, is already free.

The major risks facing investors who subscribe to Monde are the weak performance of the Philippine market and the possibility that Monde’s Quorn might fail to address the problems that hampered its growth during the past few years.

Sentiment for Philippine stocks is weak as evidenced by the 12.2-percent drop of the PSEi index year-to-date.

Meanwhile, revenue of Monde’s meat alternative business rose by a CAGR of only 5 percent from 2017 to 2020 despite the strong growth of the meat alternative market in the United Kingdom raising questions on the ability of the company to capitalize on the attractive growth opportunity of the industry.

Quorn’s dismal growth in the past few years was largely due to capacity constraints. Monde plans to address this by earmarking P4.2 billion out of its IPO proceeds for capital expenditure to boost the said business’ capacity, allowing it to meet demand equivalent to 2.5 times more than its current sales.

If Monde successfully addresses Quorn’s growth problems, there is a strong likelihood the stock will be worth much more given the meat alternative market’s long runway for growth and the resilience of the company’s domestic business. INQ

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