Financial Summary (C$M)
Paradigm Estimates
(y/e Mar) Revenue EBITDA EPS EV/Rev EV/EBITDA P/E
FY10 0.0 (6.8) (0.24) nmf nmf nmf FY11e 0.0 (5.6) (0.19) nmf nmf nmf FY12e 20.7 14.2 0.48 12.9 x 18.8 x 19.8 x FY13e 92.7 85.0 1.86 2.9 x 3.1 x 5.1 x
All figures in C$, unless otherwise noted.
Source: Company filings, Paradigm Capital Inc.
Investment Thesis. The global demand for ever higher food value from agriculture is growing at an
unprecedented pace, driven by population growth and economic growth. The functional food and beverage
markets, comprised of protein, fiber, mineral or vitamin fortified products that promote specific health benefits,
is gaining consumer attention. In particular, the addition of protein ingredients into many different foods is
increasingly gaining momentum due to scientific advances and a growing health conscious attitude amongst
many consumers. The worldwide market for protein ingredients is expected to reach US$15B in 2015 driven by
new applications and product development.
Event
Burcon licenses worldwide rights for the soy protein isolate manufacturing technology to Archer Daniels Midland (ADM‐N, NR).
Details
Burcon signed a letter of intent to license the soy protein isolate technology. A definitive agreement to be inked before March 1, 2011. No financial details provided.
An agreement should include milestone payments until they receive royalties on sales.
Royalties on sales could start in calendar Q42011.
First plant construction could start in Q2‐2011 and be completed before year end
We are assuming four plants to be build with the first one completed by Q4‐2011 and the last plant operational by 2013. Total capacity should be 280,000 metric tons (MT)/year. Other assumptions include soy protein isolates pricing of $8,500/MT and Burcon receiving a 12% royalty rate declining to 9% by 2013.
Discussions for canola protein manufacturing technology remain ongoing but completion could be delayed until the soy technology agreement is completed.
ADM could be a great partner and is currently the second largest oilseeds producer in the world with more than 250 plants worldwide.
Conclusion
The suspense is now over and we now have better indications of what the future may look like. The main value driver for ADM and Burcon has now shifted to the development of the soy protein isolates technology. It appears that more than one party was interested in partnering the soy protein technology but in the end, ADM presented the better deal. Our financial estimates are revised to reflect the new timelines. Our sensitivity analysis indicates that the soy technology could generate fully taxed EPS of $5.23/sh plus another $1.33/sh for the canola protein technology. We are maintaining
Company Profile
Company Profile (C$)
Sector Healthcare
Ticker BU‐T
Stock Rating Buy
Closing Price (C$) $9.45 12‐Mth Target (C$) $20.00 Potential ROR 112% Shares O/S Bsc (M) 29.7 Shares O/S FD (M) 29.7 Mkt Cap, Bsc (C$M) $281 Mkt Cap, FD (C$M) $281 Enterprise Value (C$M) $267 TTM Rev/sh nmf Net cash/sh $0.45 Company Description
Burcon operates as a research and
development company developing
manufacturing technologies to extract
important ingredients for use in food and
beverages. The company develops a
portfolio of composition, application, and
process patents related to its plant
protein extraction and purification
technology. Its patented processes utilize
oilseed meals for the production of
purified plant proteins that exhibit
nutritional, functional, and nutraceutical
profiles. Burcon has developed Clarisoy
from soy that could be used in food and
beverages and canola proteins, Puratein
and Supertein. Research Team
Claude Camire 416.360.1322
1-Year Stock Chart
Dec Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov 6 7 8 9 10 11 12 0 50 100 150 200 250
Source: FactSet Prices
Burcon Nutrascience Corp. (BU‐CA)
Price (CAD) Volume (Thousands)
Volume Burcon Nutrascience Corp.
01/12/10 FY10‐12 EPS lowered
11/10/08 Target raised ($20.00)
10/08/08 Target raised ($15.00)
05/01/08 Initiating target price ($12.00)
Burcon
NutraScience
Corp.
Establishing
Our
Assumptions
Even though the announcement is a non‐binding letter of intent, we think the standstill agreement provides a high level of interest from ADM. We believe it is necessary to fine tune our forecasts based on this new information.
Variable
#1
‐
Royalty
rates
The determination of royalty rates (.e. percentage amount that is to be applied to the end‐user revenues) is guided by the ‘economic fairness’ to both companies. The value conveyed is a function of specific factors relating to the licensed technology such as the uniqueness and competitive advantage of the licensed products, including the scope and remaining life of any patents. Other factors include the size of the markets in which ADM will sell the products, the degree of complexity in the technology and the length of the agreement to recuperate any upfront/milestone payments and the time to generate a decent ROI. Traditional licensing agreements in the pharmaceutical industry dictate royalty agreements between 5% (pre‐clinical products) to 30% for FDA approved products for NCEs. Contrary to the drug industry, the food industry margins are much lower which dictates a lower rate for ingredients. Our search provides us with a range of 7‐13% for novel/disruptive technology.
Variable
#2
‐
Soy
Protein
Isolates
Pricing
Soy protein has been part of the market (food and beverages) for more than 20 years. In our model, we assume a premium pricing for the soy protein isolates to current products given the significant product advantages (taste, odour, functionality and color) over existing concentrates or isolates.
Soy Prices - US$000's
Meal 200
Oil 1000
Concentrates 3,000-5,000
Isolates 7,000-10,000
Variable
#3
‐
Soy
Plant
Size
and
Roll
‐
Out
Plan
With more than 100 oilseeds plants located in every region of the globe, we estimate that the soy technology will be added to existing plants rather than building a new one, hence reducing time to market. For the soy technology we have assumed four plants would be operational by 2013, the first one located in the US with a finished capacity of 60,000 MT/year. We think this strategy will significantly reduce CAPEX for ADM and reduce cost of sales.
Prices $10,000 $4.30 $4.92 $5.53 $6.15 $6.76 $7.38 $7.99 $9,500 $4.09 $4.67 $5.26 $5.84 $6.43 $7.01 $7.59 $9,000 $3.87 $4.43 $4.98 $5.53 $6.09 $6.64 $7.19 $8,500 $3.66 $4.18 $4.70 $5.23 $5.75 $6.27 $6.79 $8,000 $3.44 $3.94 $4.43 $4.92 $5.41 $5.90 $6.39 $7,500 $3.23 $3.69 $4.15 $4.61 $5.07 $5.53 $5.99 $7,000 $3.01 $3.44 $3.87 $4.30 $4.73 $5.16 $5.60 Royalty 7.00% 8.00% 9.00% 10.00% 11.00% 12.00% 13.00% Prices $9,000 $1.10 $1.25 $1.41 $1.57 $1.72 $1.88 $2.03 $8,550 $1.04 $1.19 $1.34 $1.49 $1.64 $1.78 $1.93 $8,100 $0.99 $1.13 $1.27 $1.41 $1.55 $1.69 $1.83 $7,650 $0.93 $1.06 $1.20 $1.33 $1.46 $1.60 $1.73 $7,200 $0.88 $1.00 $1.13 $1.25 $1.38 $1.50 $1.63 $6,750 $0.82 $0.94 $1.06 $1.17 $1.29 $1.41 $1.53 $6,300 $0.77 $0.88 $0.99 $1.10 $1.21 $1.31 $1.42 Royalty 7.00% 8.00% 9.00% 10.00% 11.00% 12.00% 13.00%
FY2015 EPS -Soy protein isolates - only
FY2015 EPS -Canola protein isolates - only
Soy Protein isolates Plants
Location Plant size (MT) Operational
North America 60,000 Nov-11
Asia 100,000 Nov-12
Europe 60,000 May-13
South America 60,000 Nov-13
280,000 Canola Protein isolates Plants
Location Plant size (MT) Operational
North America 40,000 Nov-12
Asia 40,000 Oct-13 80,000
Sensitivity
Analysis
Our sensitivity analysis covers the expected revenue generation by FY15. We believe ADM could have four plants operational by 2015 with a yearly capacity of 280,000MT and two canola plants by a partner generating 80,000MT.
What
Happens
To
The
Canola
Manufacturing
Technology
Future
ADM and Burcon signed a standstill agreement to give both companies time to complete the soy agreement. ADM has been the Canola development partner since September 2003. We believe the largest value in the near term is the soy technology given it is already approved and has been used for more than 20 years.
Short
‐
term Outlook Revised — No Change to Long
‐
term
Until now, our estimates were based on a mixture of revenues from soy and canola royalties in a relatively equal contribution. The interest show by ADM towards soy is a clear indication of the current market forces, putting canola protein isolates in the back seat position. The new timelines that we have determined reflects a different ramp‐up from our original estimates.
2011e 2012e 2011e 2012e
Revenues $0 $21 $17 $34
EPS -$0.19 $0.48 $0.40 $0.96
Revised Before
Income Statement C$M
Fiscal Year ‐ March
FY09 FY10 FY11e FY12e FY13e FY14e FY15e
Canola protein ‐ royalties 9.0 39.6 61.2
Soy protein royalties 20.7 83.7 172.5 214.2
Total Revenues 20.7 92.7 212.1 275.4
Gross Margin 20.7 92.7 212.1 275.4
G&A/Mark& Sales 1.6 3.2 2.0 2.2 2.6 3.2 3.8
Research & Development 2.1 2.1 2.3 2.9 3.6 4.5 5.6
Professional Fees 1.1 1.3 1.1 1.2 1.2 1.3 1.3
Mgmt Fees & Services 0.1 0.2 0.2 0.2 0.2 0.2 0.3
Operating Expenses 4.9 6.8 5.6 6.5 7.7 9.2 11.0 EBITDA ‐5 ‐7 ‐6 14 85 203 264 EBIT ‐4.9 ‐6.8 ‐5.6 14.2 85.0 202.9 264.4 Other Expenses Other Income 0.1 0.1 EBT ‐4.8 ‐6.7 ‐5.6 14.2 85.0 202.9 264.4 Income Taxes 29.7 71.0 92.5 Net Earnings ‐4.8 ‐6.7 ‐5.6 14.2 55.2 131.9 171.8
EPS Fully Diluted ($0.19) ($0.24) ($0.19) $0.48 $1.86 $4.44 $5.79
FD Shares Out.(000's) 25.3 28.0 29.7 29.7 29.7 29.7 29.7
Source: Company filings, Paradigm Capital Inc.
Disclaimer Section
1. Paradigm Capital Inc. expects to receive or intends to seek compensation for investment banking services from the subject companies in the next 3 months.
2. Paradigm’s disclosure policies and research distribution procedures can be found on our website at www.paradigmcap.com.
3. Paradigm Capital research is available on First Call, Reuters or at www.paradigmcap.com. Issued by Paradigm Capital Inc.
Research Rating System
Paradigm Capital uses the following rating recommendations in its research:
# of % of
Recommendation Companies B/H/S What our ratings mean:
Buy 127 69% Buy – Expected returns of 20% or more over the next 6 to 12 months.
Buy (Spec) 27 15% Speculative Buy - Expected returns of 20% or more over the next 6 to 12 months on high-risk development
or "pre-revenue" companies, such as junior mining and early stage biotech companies.
Hold 29 16% Hold - Expected returns of +/-20% over the next 6 to 12 months.
Sell 2 1% Sell - Expected returns of -20% or more over the next 6 to 12 months.
Total 185
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