It’s all systems go for Burcon Nutrascience (Burcon Nutrascience Stock Quote, Chart, News, Analysts, Financials TSX:BU) as the plant protein company starts production at its joint venture facility in Manitoba. That makes for a de-risking of the stock, according to analyst Corey Hammill of Paradigm Capital, who updated clients with a report on Tuesday. Hammill reiterated his “Buy” rating for the stock while upping his target price from $4.25 to $6.00 per share, saying BU gives investors exposure to the growing demand for plant-based foods.
Vancouver-based Burcon is a plant-based proteins developer which over the past 20 years has accumulated over 300 issued patents and over 230 additional patent applications on novel plant-based proteins derived from pea, canola, soy, hemp, sunflower seeds and others. The company announced on Tuesday that its joint venture company Merit Functional Foods completed the first commercial production runs at its new pea and canola facility, producing the company’s Peazazz and Peazac proteins.
“Burcon is thrilled that Merit Foods has realized this important milestone,” said Johann F. Tergesen, Burcon’s president and CEO in a press release. “Having completed the construction and now in the midst of commissioning and optimizing its state-of-the-art facility is an impressive accomplishment during such a challenging time. Merit is ideally positioned to meet the growing need for highly functional and taste-forward plant-based proteins for use in foods and beverages including dairy alternatives, meat alternatives and other lifestyle nutrition products.”
On Merit’s structure, company founders own 42 per cent, Burcon owns 33 per cent and US agribusiness company Bunge, who made a $30-million equity investment in Merit last year, owns 25 per cent.
In his comments, Hammill said he’s particularly encouraged to see the Peazazz and Peazac brand names highlighted in the press release as it appears to indicate that all quality and technical standards have been met at the facility, the construction of which was completed at the end of December, 2020.
Hammill noted that Merit claims to produce the highest-quality and purity pea and canola proteins on the market, where pea protein typically ranges from 77 to 81 per cent content versus Merit’s product at 90 per cent. Hammill said Merit’s is currently the only commercial facility in the world capable of producing food-grade canola protein.
“With significant expansion at the plant expected, Burcon’s revenue potential can grow significantly owing to its top-line sales royalty. We estimate the royalty steps down from 7 per cent to 5 per cent as expansion at the facility continues. With such strong demand, we could see the expansion happen faster that we anticipated. The Merit joint-venture facility was built with extra square footage, so capacity can be expanded quickly with just the addition of new machines,” Hammill wrote.
As for Burcon, Hammill said the company can now return to its core competency in developing extraction technologies, saying there are many opportunities for Burcon to go forward with other pulses such as mung bean and hemp and, likely, another joint venture in a similar form to Merit. In fact, Hammill said there is likely to be a market for additional protein sources as demand looks to outpace supply over the near term, with new plant-based products coming onto the market at a rapid rate.
“Burcon NutraScience offers a unique opportunity to invest in an industry with a growing demand profile and lack of public players in the space,” Hammill wrote. “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.”
“With the backing of the [Merit] joint venture and near-term commercial opportunity, we believe Burcon has the platform to be a top-tier protein developer,” he said.
Looking at BU’s financials, Hammill forecasted 2021 EBITDA and EPS of negative $3.3 million and negative $0.05 per share and 2022 EBITDA and EPS of negative $1.7 million and positive $0.01 per share. As far as revenues from Merit go, Hammill broke down the business into three phases, with the current Phase 1 generating $16 million in revenue for BU’s share of the JV, Phase 2 (to be completed in Q4 of 2022) generating $16 million and Phase 3 (to be completed in 2024) to generate $48 million in revenue for BU.
“We had previously highlighted several catalysts that would serve as de-risking events to our valuation of Burcon, including the commencement of commercial production at the Merit Facility. Other events include new commercial off-take agreements. As we view [the new] announcement as a de-risking event, we are reducing our discount rate to seven per cent from 8.5 per cent,” Hammill wrote.
At press time, Hammill’s new $6.00 target represented a projected one-year return of 22 per cent.