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Comvita's $400M sales target pushed out two years after poor honey harvests, Craigs says

Thursday 24th May 2018

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Comvita will take another two years to reach its $400 million sales target after the manuka honey company had two poor seasons in a row, according to Craigs Investment Partners.

The brokerage downgraded its recommendation on NZX-listed Comvita to 'hold' from 'buy'. New Zealand's largest natural health products company last month lowered its forecast for annual earnings, citing adverse weather in the second half of the 2018 honey season that cut volumes. That followed what it called an "extremely poor season" in 2017. 

Comvita's shares had held up following the latest downgrade to earnings as investors waited to see if a potential merger went ahead. But the stock has fallen sharply since the company said on Monday that it had pulled out of the talks after failing to reach a deal on price. That's prompted investors and analysts to reassess the company's prospects, with Craigs cutting its profit forecast and rating on the stock.

"We continue to like the Comvita investment thematic, of becoming a more reliable premium branded manuka honey vertical targeting the Chinese consumer," Craigs research analyst Adrian Allbon said in his report titled 'Poor end to a sticky situation'.

However, he cut his outlook on the stock due to two consecutive short harvests materially impacting profitability and driving up debt, with a merger and acquisition premium now unlikely in the near term. Management needed to re-focus on core bee products to lift profitability, he said.

"Moreover, given the now two consecutive short harvests in a row, we also think it will be difficult for Comvita to deliver its sales target of NZ$400 million by FY21, given a lower sales annuity and depressed profitability also restricting growth reinvestment," Allbon said. "As a result, we now assume Comvita gets to NZ$400 million by FY23."

Comvita expects after-tax operating earnings for the year ending June 30 to be $8 million-to-$11 million, down from an earlier forecast for earnings of more than $17.1 million due to the poor honey harvest.

In its May 21 report, Craigs cut its 2018 net profit forecast to $7.5 million from $18 million and reduced its estimate for full-year sales to $180 million from $220 million. The research house also reduced its 12-month price target on the stock to $6.10 from $9.

Comvita shares fell 1.4 percent to $5.85 in early trading today, and have dropped 29 percent this year.


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