PARADIGM CAPITAL Quiet Newsflow Leads to Buying Opportunity
Investment Thesis. Burcon NutraScience Corp. offers a unique opportunity to invest in an industry
with a growing demand profile and lack of public players in the space. With growing consumer
demand for plant-based foods expected, there will be a supply issue for plant-based proteins
which are used to enhance and increase nutrition profiles of plant-based foods. Burcon has
entered a joint venture with Merit Foods; together, their commercial production facility is
underway. With the backing of the joint venture and near-term commercial opportunity, we believe
Burcon has the platform to be a top-tier protein developer.
Event
Although official newsflow has been quietly lately, we have found a series of interesting
announcements released by Burcon’s joint-venture partner, Merit Functional Foods,
through LinkedIn. We expect to see initial shipments from Merit’s newly built pea and
canola protein production facility in Q2/CY21 (Burcon’s Q1/FY21).
Highlights
Merit Production | Recall, Merit has licensed the rights to Burcon’s protein
extraction technology for both pea and canola, making Merit the only production
facility globally to have food-grade production of canola protein. Last week, Merit
highlighted its Puratein® G protein as an alternative to replace methylcellulose in
meat alternatives. Methylcellulose is a chemically modified derivative of cellulose
that provides binding properties. In layman’s terms, it is the ingredient that binds
the burger patty together when heated.
Merit Facility | Merit is expecting to have its protein ingredients in food products
on shelves by H2/CY21. We expect the next announcement to come from the joint
venture will be the signing of commercial partners and likely a facility expansion.
Merit has signed ~240 non-disclosure agreements with some of the largest global
food companies. On the expansion side, the facility was built for roughly double its
current capacity; additional capacity can be added quickly with the purchase of
more equipment. Ultimately, we expect the facility will increase five-fold from its
initial size, processing ~100Kt of input material.
Back to Basics | We have long expected that Burcon would be looking to enter
additional development agreements with new partners. On its last earnings call,
management confirmed that it is pursuing additional partnership opportunities. The
company is enhancing R&D efforts in direct relation to the demand it is seeing
from new partners; BU can now return to its core competency: developing superior
plant protein extraction technologies. Given we expect there will be a supply
shortage of plant-based protein in the near term as new plant-based products are
being introduced to the market at a rapid pace, we are confident there will be a
market for additional protein sources.
Valuation & Conclusion
The recent share price decline is likely multi-faceted: a mix of limited newsflow from
both Burcon and Merit, and perhaps the departure of fast-money investors who
invested for a possible price bump following the recent NASDAQ listing. Quiet
newsflow does not mean that Burcon isn’t working very hard in the background, both
on the initial commercialization of the Merit joint venture and on evaluating possible
new agreements. Our current target price is based solely on the Merit joint venture,
with any new deals expected to be accretive to our valuation. As Merit begins shipping
products, we expect H2 to have more newsflow, which we think should be positive for
Burcon’s share price.