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YERB.U: Challenger Brand in Secular Growth Industry

What you need to know:
• Yerbaé has been posting accelerating sales growth (+124% YoY in Q1E), using its diversified and growing distribution network which covers over 10,000 retail doors across the U.S.
• CEO Todd Gibson is a beverage industry veteran, having experience at Hansen’s Energy (Monster), SoBe, FUZE Beverage, and Coca Cola
• YERB.U is trading at 3.0x 2024E sales compared to high-growth peers at 5.9x, despite having the highest sales growth and gross margins

Yerbaé Brands Corp. (YERB.U:TSXV) produces energy drinks using plant-based ingredients, tailored to health-conscious active lifestyle consumers. Yerbaé’s beverages have zero sugar and zero calories while sporting either 100mg or 160mg of natural caffeine, compared to other healthy energy drinks that contain 20-30g of sugar. We are initiating coverage on Yerbaé Brands Corp. with a BUY rating and target price of $2.25/share.

Investment Thesis Summary
Accelerating Revenue Growth. Yerbaé has shown accelerating revenue growth over its last few quarters, including +38% YoY in Q3, +136% YoY in Q4E, and +124% YoY in Q1E. We are expecting YERB.U to build off this through 2023, nearly tripling revenue to $17.8M.

Diversified & Growing Distribution Network. YERB.U has a diversified omnichannel distribution network, covering over 10,000 retail doors. This figure has grown at a 58% CAGR since 2017. We note that there are over 350K retail doors across the U.S., providing ample TAM for YERB.U to penetrate.

Leading Gross Margin. Yerbaé has shown that it can post >50% gross margins, making it the industry leader amongst public energy drink companies. We find this especially impressive given that YERB.U is still largely a growth company focusing on expanding its distribution and growing its brand equity.

Intersection of Two Growth Industries. Yerbaé sits at the intersection of two secular growth industries, energy drinks and “better for you” plant-based products. The energy drink industry has proven to have sustainable secular growth (~7% CAGR), high margins, and low capex intensity. On the other hand, healthier living is a generational trend with over 50% of Americans claiming to actively seek out healthier options, while sugar consumption is down 20% since 2000.

Management Track Record. Yerbaé is led by its Co-Founder and CEO Todd Gibson, who brings over 20 years of experience in the beverage industry, including leadership roles at such as Hansen’s Energy (now known as Monster Beverage), SoBe (acquired by Pepsi), FUZE Beverage (acquired by Coca Cola), and Coca Cola. He is supported by a board of directors filled with CPG industry veterans and various strategic shareholders such as Performance Foods Group ($10B mkt cap).

Growth Not Reflected in Valuation. Yerbaé currently trades at 2.9x 2024E sales compared to its peers that trade at 2.4x 2024E sales on average. We note that the players that can sustain solid topline growth and gross margins (CELH and MNST) command a premium multiple of 5.9x 2024E sales. Yerbaé has the leading revenue CAGR and gross margins in our peer group, and as such, we apply a 4.5x 2024E sales multiple to achieve our $2.25/share target price.