RE:Burcon upgraded again $8.50 price target. Burcon NutraScience (BU-T)
The Wait is Almost Over
July 6, 2021
Doug Cooper, MBA
(416) 643-3863
dcooper@beaconsecurities.ca
• Burcon recently reported its Q4/FY21 (March) results, which were in-line with expectations given that Merit had not started commercial production during this period. The company’s balance sheet continues to be in good shape with $14 million in cash.
• Over the past 3 months, shares of BU are down 38%. While part of this could be attributable to a general malaise of small cap Canadian stocks over this period, many of whom have retraced to January levels (note that BU started the year at ~$3.00), we believe part of reason could be that Merit’s state-of- the-art manufacturing facility has taken longer to commission than originally thought. The issue, in our understanding, is the installation of equipment, mostly from overseas, which has been more difficult given COVID restrictions in terms of getting teams over to Winnipeg. Clearly, this is a short-term issue and BU indicated it expects Merit to be revenue generating, and thus BU royalty-generating, in its Q2 period.
• At such a time, we believe it is worth re-visiting the investment thesis and understanding what Burcon has and the likely outcome for shareholders:
a) The focus on plant-based eating continues to massively outpace regular
grocery. As more plant-based CPG products come to market, the demand for plant-based proteins for such products will continue to accelerate. This is a major positive for Merit and Burcon.
b) Burcon’s patented technology enables the highest protein purity from pea, canola and other plants (close to 1.0 on the Protein Digestibility Corrected Amino Acid Score or PCDAAS). This is the key breakthrough and why CPG companies want their product. We believe BU has the largest IP portfolio in its segment with ~300 issued patents.
c) Burcon owns 33% of Merit Functional Foods and also will receive a high single-digit royalty on sales from Merit. While Merit is set to start production from “Phase 1”, we believe it can quickly move to Phase 3, which should be capable of processing 100,000 tons of input or ~$250 million in revenue at very high margins. Given the demand for its products, selling out this capacity should not be an issue. At such a level, we believe the economic impact to Burcon would be ~$50 million. Based on current market cap of ~$350 million, BU trades at ~7x that level.
d) Bunge (BG – US, NR) owns 25% of Merit. Since BG made its investment last August, its stock is +100%, massively outperforming the S&P500 over the same period (+35%). Is such outperformance over this period a coincidence with the timing of its investment in the plant-based category, which it now says is a strategic priority? Regardless, its potential acquisition of BU has become cheaper over this period and, in our view, is more a question of when, not if and then how much?
• As pertains to this last point, we believe it is likely that BG could make such a strategic move before the end of the calendar year. Consider that by then, the Merit facility should be operating smoothly, the plant should be sold out, and BU may have additional JV’s in place, which should increase its attractiveness.
• At the end of the day, BG currently owns 25% of a small plant-based manufacturing facility. It does not own a majority position nor any IP. We believe once it is comfortable that the plant is operating smoothly and that its footprint can be cookie-cuttered to other regions, it will move forward to buy Burcon’s 33% position, which will give it 58% of Merit AND the IP. Paying 20x the economic value noted above or $1 billion, seems reasonable given other valuations in the sector (ie. OTLY – US, NR trading at 7x FY23 sales and 90x EBITDA). Such a valuation would equate to $8.50 per share.
• We maintain our Buy recommendation and $8.00 target price.
YE: March 31
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Burcon NutraSciences has over 20 years experience developing and patenting processing technologies and product applications for proteins derived from crops such as soy, pea and canola among others. In Jan 2020, its JV partner Merit Functional Foods signed a collaboration agreement with Nestle and in August 2020, Merit secured an equity investment from Bunge Ltd. Merit has built and will commercialize a pea processing plant expected to be operational in early 2021.
All prices in C$ unless otherwise stated
Q4/FY21 Results
BUY (Unch.) $8.00 (Unch.)
Recent/Closing Price(C$) $3.25
12-month Target Price (C$) $8.00