As a vegetarian, I am told that I am missing out on meat. Meat-eaters talk about its texture and taste. They crave its feel and energy boost.
There is now an alternative for vegetarians — plant-based meat. It is part of the booming alternative protein industry.
These plant-based meat patties mimic the feel of meat. They have the nutritional qualities of meat in terms of protein content. A plant-based meat patty is made of ingredients such as peas and mung. It even bleeds like a steak would, thanks to the use of beetroot. The only difference is that it does not involve the slaughter of animals.
Plant-based meat products are seen as a novelty, but they have been around for over 120 years.
In 1901, John Harvey Kellogg, who invented cornflakes, won a patent for vegetable substitute for meat. It was made of protose — wheat gluten and peanuts.
Kellogg was a member of the Seventh Day Adventist church, who was opposed to meat and liquor. He claimed that his vegetable substitute “resembles potted veal or chicken. It has a distinctly meaty odour and flavour”.
Kellogg’s claims were a gross exaggeration —the early veggie burgers tasted like salted woodchips. Luckily, Kellogg is better known for transforming breakfast.
Today’s alternative-meat makers seem to have nailed the taste, unlike Kellogg. Beyond Meat and Impossible Foods are challenging the conventional meat industry.
Beyond Meat has a mouth-watering valuation of 21x EV/Sales. Impossible Foods, its competitor, is waiting to list. According to media reports, it is valued at a similar level. Neither of these companies are even operationally profitable.
These companies are disrupters in the same vein as Tesla and Netflix. Plant-based meat is viewed as a cleaner and safer alternative to meat.
The US$1.4 trillion ($1.7 trillion) traditional meat industry is a serial abuser of the environment. Livestock causes one-seventh of the greenhouse gas emissions. Beef is the worst contributor. One-third of the world’s water is used for meat production.
Typically, 1kg of beef requires 100kg of greenhouse gas emissions. In contrast, 1kg of Impossible Foods burger patties requires just 4kg of emissions. An Impossible burger requires about 7% of the water that 1kg of beef consumes.
Meanwhile, vegetarianism is rising in the West. Only 5% of Americans are vegetarians, but the ratio could double in the next five years. Meat is viewed as inefficient and unhealthy. Alternative meat could grab a slice of traditional meat’s market.
The valuation of these disrupters seems hard to swallow. Beyond Meat has a market capitalisation of almost
US$7 billion. This is roughly half of that of WH Group, the world’s largest pork producer. WH Group has an EV/ Sales multiple of 0.7x, which means that it is trading at 4% of Beyond Meat’s valuation. WH Group dominates pork production in China, where pork is the main form of protein.
The street expects Beyond Meat’s revenue to double by FY23 to US$1.1 billion. It could reach ebitda margins of 9% (WH Group’s level) by FY23. That would make it 70 times its FY23 ebitda. However, on an FY23 EV/Sales basis, it seems to be 7x.
A premium of this level may be cheap. Disrupters like Tesla, Uber and Beyond Meat command premiums because of their scarcity. These companies are not only creating a new “market”, they are dominating the disruption.
Tesla is trading at 18 times FY21 EV/Sales of General Motors. On this basis, Beyond Meat seems like a steal, because it would only be 10 times its traditional alternatives — WH Group and Tyson Foods.
The magic force that would spice up its valuation are environmental, social and governance (ESG) funds. This is an asset class that values the degree to which a company protects the environment. It also rewards high corporate ethics. For instance, an ESG investor would prefer to invest in a solar-powered electronic vehicle producer rather than a coal mine.
ESG funds were a niche asset class as recently as 2015. Its time has come. According to Bloomberg, ESG funds could reach US$53 trillion by 2025, which would be a third of all AUM. With an ESG explosion, there would be a tsunami of capital craving for alternative meat.
Investors may find the high multiples tough to digest. But, Impossible Foods’ aims may be attainable.
Nirgunan Tiruchelvam is head of consumer sector equity at Tellimer (Exotix Capital) and author of Investing in the Covid Era. He does not hold any position in the stocks mentioned in these columns.
