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Bunge increased its stake in Merit JV in 2H'2021, and their path to an even larger stake leads to several positive scenarios for Burcon shareholders. On recent Q1'22 call, Bunge management disclosed $500 million to $1 billion of the $2 billion in its growth capex pipeline is "within alternative protein".
As noted above, Burcon's proprietary technology has led to its Merit Functional Foods JV signing over 500 NDAs with companies across the entire food industry. Merit's best-in-class pea & canola-based proteins have also attracted one of the leading global players in the agribusiness industry that did over $59 billion in revenues in 2021, Bunge Ltd. (BG). After an initial investment in Merit in August 2020, Bunge upped their stake in the 2H'2021 and now owns ~29% of the Merit JV, just below Burcon's 31.6% ownership.
Key Terms & Ownership Stakes in Merit JV (Burcon Presentation)
For investors in Burcon there was plenty to be encouraged about after Bunge's recent Q1'2022 call on April 27th. In particular, during the Q&A several analysts focused on M&A potential arising in the current environment and centered questions on the "robust pipeline of opportunities in the range of $2 billion of projects" that Bunge's management provided on the call regarding its growth capex. For reference, here is a summary of some of the relevant Q&A on this topic:
- **Vincent Andrews - Morgan Stanley analyst - "...I just had a follow-up on the comments before about the excess liquidity and I think Greg you said $2 billion you'd be willing to allocate..." **Gregory Heckman - CEO - "...Overall, one of the things that we are excited about, we've got the best pipeline of organic projects, and the best pipeline of acquisitive targets that we've had put together since we're here at the company..."
- **CFO John Neppl CFO in response to questions from Goldman Sachs analyst, Adam Samuelson - "...we've mentioned before, the $7 baseline didn't include any growth CapEx and so obviously we've got a pretty robust pipeline of opportunities today in the range of $2 billion of projects...maybe not all those will get done we'll see, but we may identify other opportunities as well. But we're very confident that with prudent capital allocation over the next couple of years...we will have improved the baseline of this company by investing capital in good projects..."
- **CEO Greg Heckman also in response to questions from Goldman Sachs analyst, Adam Samuelson - "Yeah, I think we'll be pretty comfortable to say that we've got north of $2 billion of capacity today and certainly for the right opportunity, we'd be willing to stretch that in the near term... We do feel like we're in a very strong position today with all of our metrics and our leverage ratio is low, as low as it's been in a very, very long time. And I think...we've got the people and the processes in place to manage some pretty significant opportunities."
- **Robert Moskow - Credit Suisse Analyst - "Is there any way to kind of tease out what percentage of that $2 billion is related to alternative proteins and...is there already capital in the ground for that?" **John Neppl - CFO - "We've done some, we've invested in a few opportunities, we talked about Merit earlier, I think sometime last year when we announced that, and we've got a few other investments in JV positions and some existing facilities. But the real big capital projects we have on the slate are still in development, but we talked about somewhere between $500 million and a $1 billion over the next few years, if all those get approved. Now I'm not suggesting all we're going to get approved they all have to stand on their own as we take them through the process, but it could be a substantial amount of investment if the opportunities continue to look good." **Robert Moskow - Credit Suisse Analyst - "I'm sorry the $500 to $1 billion that's within alternative protein or is that in something else?" **John Neppl - CFO - "That would be within alternative protein."
This last excerpt from the Q&A (#4) between Moskow and Neppl is key, with Bunge's CFO disclosing that $500 million to $1 billion of the $2 billion in its growth capex pipeline is "within alternative protein". Plant-based protein has consistently been highlighted by Bunge as one of three growth areas for the company, along with biofuels and specialty fats/oils, since mid-2020 when it first invested in Merit. Yet given Bunge's size, the amount of capital invested directly into plant-based proteins has been relatively limited at >$70 million for its stakes in Merit (29% ownership) and Australian Plant Proteins (acquired 22% in April 2021 for $35 million). That is about to change, and potentially in a meaningful way.
With respect to discretionary investments in growth and productivity projects, Bunge's 2021 & 2020 10K filings both note they are focusing on their "strategy to strengthen our oilseeds platform, increase participation in biofuels and plant-based proteins, and grow our value-added oils business". In its recent 2021 10K, Bunge guided to a capex spend of "in the range of $650 million to $750 million in 2022" for both non-discretionary (maintenance, safety, compliance) and discretionary investments, well above the $399 million in capex spent on the same two areas in 2021. How much of this ~$250 to $350 million in additional capex spend this year may be directed towards plant proteins remains to be seen, yet Bunge's commentary on its Q1 conference call suggests it future spending plans for plant proteins is quite significant and that is positive for Burcon.