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'Glamour stock' Comvita slumps on profit downgrade
Comvita shares, which have benefited the past two years from huge demand for manuka honey, slumped today after the company warned it would post an operational loss due to weaker than expected trading and as a poor season dents the honey harvest in New Zealand.
The Te Puke-based company expects to report an after-tax operating loss in the order of $7 million in the year ending June 30, 2017, it said in a statement. That's a downgrade from its January forecast when it expected after-tax operating earnings of between $5 million and $7 million, and its earlier guidance for earnings in line with 2016's $17.1 million.
The shares dropped 14 percent to $7.40, making them the biggest decliner on the S&P/NZX50 benchmark index in morning trading.
Rising demand for New Zealand's manuka honey, prized for its health benefits, has bolstered the fortunes of Comvita, whose shares surged from below $4 at the start of 2015 to a record $13 in May 2016. However the stock has been on the decline since then after the company warned earnings would be impacted by a weaker honey harvest and slower sales due to a clamp down on China's informal trading channels. It said today that trading in its two largest markets of Australia and New Zealand hadn't rebounded as expected over the last two months and weren't likely to do so by the end of this financial year. Poor weather had continued to weigh on honey production for the 2016/17 season, further denting sales, it said.
"It was a glamour stock through 2015 through to the middle of 2016 where it rallied extremely strongly," said Grant Williamson, director at Hamilton Hindin Greene. "Expectations obviously haven't been met. This is another earnings downgrade from the company and therefore investors have been rather heavy handed in selling the stock down. I believe it's warranted given that the company has not managed to meet investor expectations.
"The market got a little bit too excited with Comvita - honey and honey products were all the rage and that created huge demand for the shares. I believe that they are coming back to fairer value now," Williamson said. "It's very disappointing for investors."
The company said today that it expects funds from the sale of its Medihoney brand and shareholding in Derma Sciences will bolster the bottom line, forecasting annual net profit of $9 million, down from its January expectation of between $20 million and $22 million.
Comvita chief executive Scott Coulter said the company expects its financial performance to improve once inventory through its sales channels has run down.
Chair Neil Craig said it tried to mitigate against regional weather events by having hives strategically located around the country but can't mitigate against poor weather across the whole country. He stressed the poor harvest was seen as a "one-off" event, described by some experts as a "one-in-20-year event."
"Given the nature of the 2016/2017 honey harvest and the fact that Comvita has significant levels of inventory, the extremely poor season is unlikely to impact future profitability," Craig said. "While the simultaneous impact of two very significant events in one financial year is 'tough to stomach', the Comvita business model remains sound."
To counter the hit to its earnings, Comvita is focused on productivity and reducing costs, he said.
"As part of our diversification strategy we will deliver significant new market, channel and product innovation initiatives this year which will underpin our sales increase in the second half year and sets us up well for FY18," Craig said. "Given an average honey harvest in 2017/2018, we remain on track to deliver our medium and longer term strategic objectives beyond what has been a very challenging period of time for the company."