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Comvita turns to FY operating profit, has positive outlook for this year

Tuesday 21st August 2018

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Comvita, the worst performer on New Zealand's benchmark index this year following two poor honey harvests, turned to a full-year operating profit from a loss a year earlier and said it has a positive outlook for the current financial year as it invests in mānuka honey supply.

New Zealand's only listed honey company posted an after-tax operating profit of $9.3 million in the year ended June 30, within its forecast range of $8 million-to-$11 million, and marking a turnaround from a loss of $5.5 million in the year-earlier period, the Paengaroa-based company said in a statement. 

Comvita's flagship mānuka honey business can be volatile as weather conditions impact honey production, and the natural health products company has been hit the last two seasons by adverse weather that reduced volumes and hurt earnings. The company said today it was narrowing its focus to its mānuka honey and propolis businesses and has made significant investment in acquiring raw honey inventory during the past quarter to ensure it can meet future demand.

"We are very pleased with a return to operating profitability during FY18," the company said. "Following a second poor honey season in a row we were conscious of securing enough inventory early to satisfy our full year expectations rather than relying on a normal honey season in 2018/19 to satisfy our demand.

"The history of honey harvests in New Zealand shows that empirically a third consecutive poor honey season is unlikely," Comvita said.

Still, the company said it was working to reduce the financial exposure in the event of another poor harvest, by reducing the fixed-cost overhead in its apiary business and using its scientific knowledge to select hive sites that optimize profitability.

"It is very early in the new financial year. However, we are confident that given the changes we have made to our apiary model, our renewed focus on China and the US market opportunities and an increase in marketing spend at the expense of fixed overhead costs, we have a positive outlook for FY19."

Comvita said it would provide an update on the outlook at its Oct. 18 annual meeting.

The shares recently traded down 0.9 percent to $5.65 and have dropped 31 percent so far this year, making them the worst performing stock on the S&P/NZX 50 index, which has risen 8.5 percent over the same period. Ahead of today's results, Comvita stock was rated an average 'hold' with a $6.63 price target, according to Reuters data.

In the past year, sales grew 19 percent to $176.7 million as grey channel sales in Australasia, where individuals buy products to on-sell in Asia, grew 58 percent, while demand in key Asian and North American markets continued to grow.

The company said sales of UMF mānuka honey products increased 54 percent and all its overseas markets where it has an in-market sales office, including Australia, UK, Hong Kong, Korea, Japan and the US, were profitable. Its branded business produced an after-tax operating profit of $15.5 million in 2018, up from $1.1 million in 2017 when it was hurt by Chinese regulatory change affecting sales through the grey channel. Chinese consumers, who value foods with health benefits, are estimated to buy about 60 percent of the company's products.

Comvita will pay a final dividend of 2 cents a share on Sept. 28, taking the 2018 annual dividend to 6 cents. In 2017, it only paid a first-half dividend of 2 cents. The company said the 2018 payment represents 29 percent of operating profit after tax, and announced a change in dividend policy to 25-30 percent of operating profit after tax from a previous policy to pay 40-45 percent of after-tax profits.

"The board believes a change to this lower payout ratio is more appropriate for a high-growth company with ongoing demand for cash to fund growth," it said.

The company said it welcomed New Zealand regulatory changes which introduced legal enforceable standards for mānuka honey, and said it grew raw material inventories, comprising mostly UMF mānuka honey, to $89.3 million from $60 million over the past year as part of a more aggressive approach to purchasing honey so it had stock available as global retailers adapted to the change.

It has started a $12 million capital programme to upgrade its mānuka honey production capability at its Paengaroa base, due for completion in February 2019, and is also investing in mānuka seed nurseries and plantings to ensure it has future supply.

The investments are debt funded, and the company this month increased its borrowing facility to $130.3 million from $110.3 million. At its June 30 balance date, Comvita had net debt of $91.8 million, up from $61.9 million a year earlier.

Comvita has a distribution joint venture in China with its Chinese distribution partner Shenzhen Comvita Natural Food Co, which has more than 400 branded Comvita stores or kiosks throughout China and holds a stake in Comvita. It said the venture continued its good start, with sales of $46 million and its 51 percent share of the JV after-tax profit of $3.3 million.

In addition, about 10 percent of Comvita is owned by China Resources Ng Fung, a Shenzhen-based food company that stocks Comvita products in its stores and more than 4,000 supermarkets belonging to affiliated retailers. 


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