Meating Demand – The lean, green money-making machine
23 October 2020
Global meat market revenues are expected to almost double over the next 20 years; however, its growth looks set to be driven by the plant- and cell-based meat subsectors. Plant-based products should dominate the meat alternatives space over the next five years, where innovation is creating a credible consumer proposition. Products can now mimic the sensory profile of conventional meat, where tastes and textures offer a meat-like experience. Kearney estimates that revenue for the global plant-based meat market is projected to grow from US$46bn to US$120bn between 2018 and 2025, representing a 15% CAGR. Longer-term growth projections vary greatly, with revenue estimates for the global market in 2030 ranging from $140bn (Barclays) to $252bn (Kearney). The number of companies entering the market is proliferating, including a number of large multinationals that can support significant R&D investment. That said, the plant-based meat market is still in its infancy and faces several headwinds, including the threat of competition and regulatory scrutiny.
Innovation: A catalyst for growth?
Consuming a wholly plant-based diet is not a new concept, nor are the links between animal protein consumption and its impact on the environment, animal welfare and human health. However, the popularity of plant-based foods has accelerated recently, with 29% sales growth for the US plant-based meat market between 2017 and 2019, outperforming the overall US retail food market growth of 4% (Good Food Institute). Initiatives such as Veganuary and the emergence of flexitarianism (to reduce overall meat intake) have encouraged consumers to transition towards plant-based products. Pure-play Beyond Meat is a key innovator in the plant-based meat industry. Refinitiv consensus forecasts anticipate its sales to grow from US$298m in 2019 to US$480m in 2020 (+61%) and to US$1.5bn by 2024 (+38.5% CAGR). Additionally, Greggs’ addition of its vegan sausage roll contributed to outstanding like-for-like sales growth of 9.6% in the first seven weeks of FY19.
Growing number of investment opportunities
Beyond Meat’s debut on the Nasdaq stock market in 2019 represented the first public investment opportunity in plant-based meat; however, with demand rising significantly over the last few years, so too has the number of companies entering the market. Nestlé, Tyson and Tesco have all invested heavily in their own plant-based products and have leveraged their established market positions to compete with the likes of Beyond Meat. Restaurants provide another route for investors, with examples including Burger King (a Restaurant Brand’s company), which uses Beyond Meat in its plant-based range, (which has come under criticism as the plant-based patties are cooked on the same grill as conventional patties) or Greggs, which manufactures its own vegan range (which has come under criticism as the plant-based patties are cooked on the same grill as conventional patties). Alternatively, Science in Sport has a plant-based range of sports supplements, providing an alternative to traditional supplements such as whey protein.
|Company mentioned||Ticket||Market Cap (m)||Price ($)|
|Merck & Co Inc||MRK||201,909||79.8|
|Yum! Brands Inc||YUM||30,526||101.3|
|Hormel Foods Corp||HRL||26,770||49.6|
|Restaurant Brands International Inc||QSR.TO||26,642||56.8|
|Tyson Foods Inc||TSN||21,874||60.1|
|Beyond Meat Inc||BYND.O||10,724||171.7|
|J Sainsbury PLC||SBRY.L||60,71||2.7|
|Hain Celestial Group Inc||HAIN.O||3,543||35.1|
|Domino's Pizza Group PLC||DOM.L||1,952||4.1|
|Hilton Food Group PLC||HFG.L||1,286||15.7|
|Hotel Chocolat Group PLC||HOTC.L||616||4.9|
|Very Good Food Company Inc||VERY.CD||165||1.9|
|Burcon NutraScience Corp||BU.TO||158||1.6|
|Modern Meat Inc||MEAT.CD||68||2.4|
|Science in Sport PLC||SISS.L||57||0.4|
Source: Refintiv, Edison Investment Research
Kearney forecasts (Exhibit 1) that the global meat market is projected to grow from c US$1tn in 2018 to US$1.8tn by 2040, which includes conventional meat, novel vegan meat replacement (plant-based meat) and cultured meat. Cultured meat is created from conventional meat by taking cells from an animal and then exponentially growing them in a bioreactor, which involves no animal slaughter and is far more efficient than traditional livestock farming.
There is a developing awareness of the increasing unsustainability of conventional meat as populations grow, providing significant scope for alternatives. Plant-based meat is the only commercially available alternative and is forecast to grow significantly over the next 20 years as conventional meat sales decline. Kearney forecasts that novel vegan meat replacements will have an 18% share of the global meat market by 2030 (US$252bn), up from c 4% currently (US$46bn). That said, 2030 revenue estimates vary, with UBS and Barclays expecting market sales to reach US$85bn (c 6%) and US$140bn (c 10%) respectively.
Exhibit 1: Growth of the total global meat market by type
Source: Kearney, Edison Investment Research
We see multiple and varied routes to investing in plant-based protein markets. This includes producers, ranging from those with a focused portfolio to companies with broader portfolios that include plant-based alternatives as part of the mix. Secondary to producers, investors can also gain exposure via companies that serve and distribute products containing these alternatives; for example, restaurants, cafés and shops that provide food services and prepared products. More tangentially, investment exposure can be accessed via food packaging and nutritional and health supplements. In Exhibit 3 we present valuations for a range of companies, split into these various categories.
Pure-play food producers
In Exhibit 2 we show the one-year performance of pure-play plant-based meat producers. Three of these have raised funds via IPO within the last two years. Beyond Meat’s 2019 IPO (which raised US$240m) was the first in the sector, followed by the Very Good Food Company (listed 16 June 2020, raised C$4m) and Modern Meat (listed 1 July 2020, raised C$2.5m). Burcon NutraScience, an R&D company focused on plant protein extraction and purification, also offers a pure-play investment opportunity. Some of the key points for this segment are:
- Since the COVID-19 March related sell-offs, pure-play food producers have recovered more strongly than the broader food producer category, with Burcon NutraScience up 362% to a high of US$2.91/share and Beyond Meat up 261% to a high of US$195/share. Over the past 12 months, Burcon and Beyond Meat have outperformed the S&P 500 Packaged Food and Meats index by 65% and 37% respectively.
- We note that Beyond Meat trades at a materially higher FY21 EV/sales ratio than all other companies and categories shown in Exhibit 3. Sales for Burcon, Very Good Food and Modern Meat are too small for multiples to be significant.
- Multiple valuations, as typical for nascent companies reporting either negative or low earnings and absorbing high R&D investment tend not to be appropriate at this stage.
- Long-term earnings visibility obscured by potential competition or regulatory headwinds.
- In the shorter term, demand from restaurants may be constrained due to the perceived risk of adding to menu complexity with plant-based foods due to the earnings impact caused by COVID-19.
Other food producers and relevant companies
Relative to companies focusing on plant-based proteins, other food producers are typically larger, with more diversified portfolios and stronger balance sheets. They offer lower risk but potentially less return if sales in the plant-based market reach the top end of the growth projections detailed in Exhibit 1. Some of the key points for these companies are:
- Mid-cap food producers have been the strongest performers of the other companies in Exhibit 4 over the last 12 months, with Hain Celestial and Cranswick up 53% and 7% respectively. Looking comparatively at large caps, Nestlé is up 2% and Tyson is down 27%, but the overall price performances for the selected companies detailed in Exhibit 4 are more stable relative to pure plays.
- Prospective multiples for food producers with hybrid models, particularly larger and more diverse players such as Nestlé, are higher on average than traditional meat processors such as Tyson.
- Food producers outside of pure play are more attractive from an income perspective; median dividend yields range from 2–3% versus no dividend for companies focusing on plant-based products.
- Forward earnings multiples for large-cap food service companies are significantly higher relative to the rest of the table (except for pure play); however, multiples for mid-cap food service companies are on par with the other averages.
Supermarkets and companies focusing on food packaging and sports supplements have the lowest forward earnings multiples; supermarkets also offer the highest yields, as can be seen in Exhibit 4.
|Name||Description||Share price (ccy)||Quoted currency||Market cap (ccym)||Market cap ($m)|
|BYND.O||Beyond Meat||Leading plant-based meat producer||165||USD||10275||10275|
|BU.TO||Burcon NS||Plant protein extraction company||2||CAD||150||199|
|VERY.CD||Very Good Food||Emerging plant-based food tech||2||CAD||157||208|
|MEAT.CD||Modern Meat||Develops plant-based meat||3||CAD||71||93|