Burcon: Partner Bunge's $500 Million To $1 Billion Of Growth Capex Within Alternative Proteins Bodes Well

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Plant-based protein megatrend intact as evidenced by Nestle, Danone, Bunge, and others. Unlike product specific plant-based plays, Burcon’s superior proteins can be utilized across entire spectrum of plant-based food & beverage products, and increasingly competitive landscape bodes well for its best-in-class proteins.

Despite overall market volatility and weakness in numerous plant-based companies’ stock prices, the shift to plant-based protein continues within the food industry. This was reinforced on Nestle’s (OTCPK:NSRGY) quarterly conference call in February 2022, with CEO Mark Schneider stating yet again that “plant-based food is one of these once-in-a-generation opportunities”. Nestle’s plant-based category had “strong double-digit organic sales growth” and their success is driven not just from products like plant-based burgers and chicken pieces, but also plant-based alternatives including ready-made meals, tuna, shrimp, vegan KitKat, culinary, etc.

Among some other major CPG companies, Danone (OTCQX:DANOY) also reported in February 2022 that its “plant-based portfolio registered solid mid-single-digit growth amid supply challenges” in Q4. They discussed numerous plant-based product lines on their call and highlighted the “the high protein impact of our portfolio” with stellar performance from both Yopro and Hipro. Additionally, Unilever (UL) continues its march to build a portfolio of plant-based meat and dairy alternative brands that will generate 1 billion Euros in revenue by 2025. More recently, PepsiCo’s (PEP) plant-based snack joint venture with Beyond Meat just launched its first product in March 2023, with plans to release additional products in the future. With respect to more product-specific plant-based plays such as Oatly (OTLY) in alternative milk & dairy products and Beyond Meat (BYND) in alternative meats, they have guided to 2022 y-o-y revenue growth of 37% to 43% ($880MM-$920MM) and 21% to 33% ($560MM-$620MM), respectively.

Total Global Plant-Based Retail Market Size (Bloomberg Intelligence, OECD FAO Agricultural Outlook, GFI 2021 State of the Industry Report )

The results and plans of these companies provide a small glimpse into the continued proliferation of plant-based products and plant-based proteins in the food industry, and that carries significant implications for Burcon NutraScience (NASDAQ:BRCN; BU.TO), the global technology leader in developing best-in-class plant-based proteins for foods & beverages. As Bloomberg Intelligence noted in its report titled “Plant-Based Foods Poised for Explosive Growth” on May 10, 2022, based on their scenario analysis if alternative-meat and dairy product sales and penetration continue to grow, the “global plant-based alternatives market could swell to $166 billion in the next decade from $33.2 billion in 2021” or 10.6% of the expected $2.2 trillion protein market.

Importantly, unlike product specific plant-based plays, Burcon’s superior proteins can be utilized across the entire spectrum of plant-based food & beverage products, and the constant drive to achieve taste profiles that are inline or better than “traditional” meat & beverages and the rising competition amongst plant-based peers themselves are both drivers for product innovation, and in turn for Burcon’s best-in-class proteins that enable superior taste & texture and provide better functionality than any plant-based proteins on the market today.

List of Companies Focused on Plant-based Solutions (Burcon’s presentation at Roth Conference in March 2022)

Additionally, high-protein content is a major driver of sales for multiple plant-based product offerings. As noted above, Danone specifically cited the “the high protein impact of our portfolio” with stellar performance from its Yopro and Hipro offerings. Also as discussed in a previous SA article on Burcon, high-protein content is a key factor in the success for the fast-growing Ripple Foods’ pea-based alternative milk offering, with a very successful advertising campaign centered on its greater protein content vs other alternative milk offerings (almond, cashew, coconut, etc).

Danone & Ripple High-Protein Offerings (Danone & Ripple websites)

These competitive & high-protein drivers are just a few of the many reasons that have led to over 500 NDAs being signed with Burcon’s Merit Functional Foods JV, for its groundbreaking pea & canola-based proteins that it produces with technology licensed from Burcon in return for a royalty. While Merit has been tight-lipped on actual customer names to date, we know delivery of its pea-based proteins to a “major food & beverage customer” & “leading brand for dairy & dairy alternative products” took place during calendar Q4’2021 as per Burcon’s latest conference call.

The Merit JV has forecasted it will reach full allocation of its Phase 1 capacity by the end of 2022 with some larger sales expected in the back half of the year, according to Burcon on its most recent quarterly call. If Merit achieves that goal it would equate to roughly $60 million (Canadian) in potential revenues in calendar 2023, and it would likely lead to the Phase 2 expansion of the plant, roughly doubling its capacity and revenue potential. These positive events should warrant attention investment community as this success increasingly finds its way into Burcon’s numbers, and it may already be catching the attention of one of Burcon’s partners in the Merit JV…Bunge.

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:

  1. **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…”
  2. **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…”
  3. **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.”
  4. **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.

Bunge’s Increasing Discretionary Capex (Bunge Q4 Call Presentation)

This increasing interest and future spend on plant proteins makes sense from a strategic perspective, as Bunge has described on numerous occasions, plant-based protein fits hand-in-glove with its specialty fats/oils business. Here are some comments from its CEO at the Barclays conference in September 2021 around this concept:

Then plant-based proteins is another one of those new structural demands, and we’re already enjoying that growth the last few years with our specialty lipids business as we provide a lot of the products that give the mouth feel and the bite and the taste in those plant protein-based products that people love. And now we’re working with our customers backwards and to be a supplier of the plant protein. That’s something you’ll see us develop over the next couple of years. That won’t be an overnight flip the switch, but we’re excited about the demand that is in place, and our customers are asking us to get involved. We’ve been a commodity supplier there before, and now it’s time to be a value-added supplier.”

There are many ways that a company the size of Bunge can be a “value-added supplier”, yet one that stands out from the rest of its competition amongst its peers like Cargill, Archer-Daniels Midland (ADM), and others, is its ability to supply the highest-purity, best-tasting, best-in-class functionality plant-based proteins on the market, achieved through Burcon’s proprietary technologies. Bunge likely sees this as a distinct advantage as well and could drive them to become a more substantial owner in the Merit JV.

A larger stake in Merit is something that Bunge has considered since its first investment back into the JV in August 2020. As per the terms of the deal, Bunge thought enough of the future potential in plant proteins and the potential value of these high-purity pea & canola proteins from Burcon’s proprietary process, that they worked in an option to acquire the Merit joint venture entirely. Here are the details around buyout options as described in Burcon’s material change report filed on September 4, 2020, available via Canada’s SEDAR.

  1. On August 27, 2020, Bunge Ltd made an investment of $30 million into Merit Foods. In addition to purchasing $30 million in equity directly from Merit, they purchased additional equity shares and debt from other JV Partners (Ryan Bracken, Barry Tomiski, and Shaun Crew), and these combined transactions resulted in Bunge’s 25% stake in Merit Foods.
  2. Under the Amended and Restated Shareholders Agreement, Bunge has the right to acquire the balance of the Merit shares owned by the Other Shareholders through a call option. The agreement sets out the terms and conditions of the Call Option, including the circumstances under which the Call Option will vest and become exercisable. The principal intended trigger for the vesting of the Call Option is based on the completion, commissioning and demonstrated growth of Merit’s canola and pea protein production facility in Winnipeg, Manitoba.
  3. If and when Bunge exercises the Call Option to acquire the Merit shares owned by the Other Shareholders, Burcon Holdings then has the right, but not the obligation, to sell all, but not less than all, of its interest in Merit to Bunge at the equivalent valuation.
  4. Under the Amended License Agreement the parties have agreed among other things, that if Bunge exercises its Call Option to buyout the Other Shareholders…Merit will have an option to convert the license…for an amount representing the discounted future royalties that would otherwise be payable to Burcon over the life of the license agreement.

So, Bunge has the right to buyout the other Merit partners, who own ~40% of the JV, under certain conditions through a call option. As per above, the “principal intended trigger for the vesting of the Call Option is based on the completion, commissioning and demonstrated growth of Merit’s canola and pea protein production facility in Winnipeg, Manitoba”. Depending on how Bunge defines “demonstrated growth” this trigger may have been pulled already as (1) the Merit plant has been completed, and (2) the Merit plant has been commissioned. If Bunge exercises this right, then Burcon can agree to sell its stake in Merit at the equivalent valuation paid to the other JV partners, but that is solely Burcon’s discretion. Additionally, if Bunge exercises the right to acquire the other partners’ stakes but Burcon does not agree to sell, then Bunge can buyout the future royalties owed to Burcon for a dollar amount representing the net-present-value of those future royalties.

How much could these future royalties be worth? Burcon has stated Phase 1 capacity would produce >20,000 metric tons of pea/canola protein and generate ~C$60 million annually; Phase 2 doubles capacity to >40,000 metric tons leading to C$120 million annually; and Phase 3 capacity is ~100,000 metric tons taking sales to C$300 million annually. If you do some back-of-the-envelope math, you get to royalty revenues from the commercial plant that total somewhere between $150 million and $180 million between 2023 – 2037. Using a 10% DCF, which seems reasonable, and the net present value for these future royalties falls between C$67 million and C$78 million, which would be a decent size check to Burcon, especially as it would still maintain a 31% stake in Merit.

If Bunge exercises any of these options to acquire a larger stake in Merit, they all represent potential meaningful catalysts for Burcon. Furthermore, given Bunge expressed this interest to acquire a larger stake or the entire Merit JV via the terms of the deal when it originally invested, there is logic to the fact that they could look to buyout Burcon itself instead. This is an avenue that may look increasingly attractive to Bunge given the pullback in Burcon’s valuation, along with so many other plant-based company stocks in the past 12 months.

The rationale behind Bunge looking to acquire Burcon versus Merit is supported by several factors:

  1. Buying out the other partners would lead Bunge to an ownership stake of ~68.4% in Merit, which has a 20-year license to Burcon’s technology for pulses, including canola and peas; yet buying Burcon would lead Bunge to an ownership stake of 60.5% in Merit, with full ownership of the underlying IP for not only peas, canola and pulses, but also for sunflower, soy, hemp, oats, flaxseed, and other plants.
  2. Buying Burcon would result in Bunge not having to pay mid-single-digit royalty on future Merit sales or issue a potentially sizable check to buyout the future royalties owed to Burcon.
  3. Buying Burcon would lead to Bunge acquiring its proprietary technology to generate best-in-class proteins that can be applied to many plants that Bunge already has a meaningful presence in. Remember, the CEO of Bunge has said that plant proteins fit hand-in-glove with its specialty fats/oils business. Well Bunge is a dominant player in soy and processes a full range of soft oils including canola, sunflowers, and more, and as Bunge’s CEO noted at the Barclays conference, “…Now we’re working with our customers backwards and to be a supplier of the plant protein…We’ve been a commodity supplier there before, and now it’s time to be a value-added supplier.” Bunge’s customer list that it can be a “value-added supplier” to is extensive and extends across all of these plants they process, and that makes the acquisition of Burcon versus Merit worthy of consideration.

Bunge Oilseeds Footprint (Bunge Virtual Business Meeting)

No matter whether (1) Bunge acquires the other partners in Merit, (2) Bunge buys Merit altogether (if Burcon agrees to sell its stake), (3) they buyout the future royalties owed to Burcon (which could only happen if they first bought out the other partners), or (4) they look to acquire Burcon itself, all of these are positive catalysts for Burcon.

Non-dilutive $10 million credit line from Burcon’s largest shareholder, Firewood (wholly owned by Burcon director) is strong sign of support & positive indicator for outlook ahead; new JV & CEO next catalysts.

As per a company update in late April, there are several catalysts ahead for Burcon, including a new joint venture for sunflowers (#3 crop globally) or another plant and a new CEO. Notably with respect to a new potential joint venture, Burcon stated “due diligence and negotiations on potential strategic partnerships are progressing well with various parties moving forward with pace. We are very encouraged by the progress of our potential partnership discussions and continue to work towards reaching an agreement to bring our innovative protein technologies to market.”

Beyond potential JVs, Burcon also noted they are collaborating with food processors to explore opportunities to leverage Burcon’s core protein extraction and purification platform for use in upcycled protein production arising from under-utilized crops or byproducts that are otherwise disposed as waste or sold as animal feed. One example of turning “leftover” by-products from a plant and making valuable proteins via Burcon’s platform was covered in a prior SA article, around oat milk, one of the fastest growing segments in alternative milks.

As detailed in the article “Oat milk surges to second most popular in plant-based dairy” in Food Dive, “consumers have become enamored by the taste, similarity to dairy milk, health halo and sustainability features of oat milk. The beverage made from the popular grain can foam and mix like dairy milk, and proponents say it is the most sustainable dairy alternative. Switching from cow’s milk to oat milk can save up to 73% of carbon dioxide emissions, and oats are a sustainable crop that aren’t associated with deforestation or excessive need for water.” Major players like Danone, Chobani, Nestlé’s Nesquik, Califia Farms, SunOpta (STKL) and Oatly (OTLY) have launched oat-milk beverages and products.

So why the focus on oats and oat milk? Well SunOpta is a large producer of oat milk in North America, and its CEO stated the following in this Food Business News article, “When you make oat milk, 100 lbs of oats equals 70 lbs of liquid and 30 lbs of solids. What are we doing is finding uses for the solids. It turns out that solid is 50% protein and 25% fiber. We are in the process of identifying how to dry and mill it into a super-high protein, high fiber oat flour that can be used to make cookies, crackers breakfast cereal, etc. We’re taking something that basically went to landfills and extracting the full value out of it.”

Taking by-products that goes to landfills and repurposing them into a high-purity, high-functionality protein with great taste/texture to the point where it can be added into the oat milk itself… that’s one example of an opportunity available with Burcon’s platform. By raising protein inclusion rates, there’s a window of opportunity for oat-based milks to separate themselves from their peers and to better compete against dairy milk and almond-milk without sacrificing taste. If an oat-based milk manufacturer, say Danone’s Silk, Oatly, Califia Farms, HP Hood’s Planet Oat, SunOpta, etc., can take “something that basically went to landfills” and turn it into a high-purity protein that can be added to its own products to improve protein inclusion rates without impacting taste or be sold off into the marketplace, it would be a win/win for their margins and their product’s nutritional profiles. Look forward to hearing more from Burcon on these potential collaborations, especially as Burcon noted food processors “are looking to Burcon for solutions with upcycling initiatives”.

Moving onto the CEO search, Burcon provided the following coloring late April: “Burcon’s board of directors has shortlisted a few select individuals, all of whom are seasoned professionals within the specialty food ingredient space. Burcon’s board is very encouraged by the calibre of candidates that have come forward and the process is now in its final stages.” With the broad opportunity at hand with Burcon, expect the announcement of a seasoned industry executive as CEO to be a catalyst for the shares.

All of these encouraging developments were recently reinforced via a non-dilutive $10 million credit line from Burcon’s largest shareholder, Firewood (wholly-owned by Burcon director Alan Chan), that owns 21% of Burcon. This move represents a strong sign of support and is a positive indicator for the outlook ahead.

Risks/Summary

As noted in prior SA articles, one of the risks was there could be unforeseen issues regarding the launch of the initial commercial plant. That risk largely played out in 2021 as the optimization process to maximize output/yield for Merit’s “flex” plant (producing proteins from both canola & peas) & eventual commissioning of the plant took longer than Street expectations, and as a result Burcon consistently returned quarterly results that were below consensus estimates. While the plant is now fully commissioned and Merit expects to sell out of its Phase 1 capacity by the end of this year, much of those new customer contracts will be weighted to the back half of 2022, and it remains to be seen if the Street has adjusted their ’22 estimates to this reality. On the flip side, if Merit comes close to selling out its full Phase 1 capacity, then its revenues in 2023 could reach C$60 million. That makes Burcon look attractive at these levels from the perspective that (1) it owns 31.4% of the JV, (2) its royalty revenues could rise to $3 to $4 million next year, (3) it likely leads to expansion to Phase 2, doubling the plant’s capacity, (4) and it could lead to Bunge moving forward on the multiple strategic options mentioned above, any of which would be positive for Burcon.

Separately, there are risks around the timing of closing a second joint venture for a new plant-based protein. While Burcon under new management stated at the end of April ’22 that “due diligence and negotiations on potential strategic partnerships are progressing well with various parties moving forward with pace. We are very encouraged by the progress of our potential partnership discussions and continue to work towards reaching an agreement to bring our innovative protein technologies to market”, the reality is Burcon was expected to close a second joint venture by September/October of 2021 given commentary & timelines provided by Burcon’s prior CEO on quarterly calls during calendar 2021. Whether the new management team is more adept at closing these potential strategic partnerships remains to be seen, yet their statement that “negotiations on potential strategic partnerships on progressing well with various parties moving forward with pace” does seem encouraging. We should learn more on this front in the next few months, and if Burcon succeeds in securing a second partner for a new plant-based protein, in particular for sunflower which is the 3rd largest crop globally and a target that Burcon has vocally been focused on, it should be a major catalyst for the shares.

With these risks in mind, the upside is compelling. Using estimates from just the initial plant at full capacity (which would be $300 million in annual sales based on the numbers provided above), Burcon’s 31.6% equity stake equates to ~$93 million in annual sales (not consolidated) and ~$15 million in annual royalties. This is solely from the initial Merit JV commercial plant…it does not include (1) any revenue opportunities if the JV expands beyond one commercial plant, and (2) any revenue potential from the substantial prospects for additional joint ventures or collaborations to leverage Burcon’s proprietary protein extraction capabilities in sunflower seeds, hemp, soy, flava beans, mung beans, buckwheat, oats, etc.

In summary, Burcon offers investors a unique opportunity to invest in the ongoing plant-protein megatrend. Its proprietary best-in-class plant-based protein technology has attracted over 500 NDAs through its Merit JV, and it has an excellent partner in Bunge with a global presence in oilseeds, that did $59 billion in revenues in 2021 and recently disclosed a substantial portion (25-50%) of its $2 billion pipeline in growth capex is within alternative proteins. Importantly, unlike product specific plant-based plays such as Oatly and Beyond Meat, Burcon’s superior proteins can be utilized across the entire spectrum of plant-based food & beverage products, including those from major CPG companies like Nestle, Danone, PepsiCo, and others, that are seeing solid growth trends with their plant-based products. The constant drive for all producers of plant-based products to achieve taste profiles that are inline or better than “traditional” meat & beverages, as well as the rising competition amongst plant-based peers themselves, are key drivers for product innovation, and in turn for Burcon’s best-in-class proteins that enable superior taste & texture and provide better functionality than any plant-based proteins on the market today & for the foreseeable future.