'Glamour stock' Comvita slumps on profit downgrade

Comvita chief executive Scott Coulter
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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."

(BusinessDesk)


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11 Comments & Questions

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Welcome to the vagaries of an industry where success is ultimately determined by the weather and biological changes.

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You don't think management may play a part in the ultimate success or failure Charlie?

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Company attributes loss due to weaker than expected sales and a poor harvest. In the same breath, it then states that Comvita has significant levels of inventory so future profitability will not be impacted!

So how the hell did the poor harvest this year impact on profit when they have plenty of inventory? Is it me polish English or is it double dutch?

Unless of course Comvita has been indulging in accounting gymnastics by revaluing its contracted purchase of honey higher in its books. So harvest down, less revaluation upwards.

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Poor harvest means costs with no product. Good inventory levels mean they will be able to take advantage of the shortage which will mean higher prices, but as inventory is the lower of cost or NRV those higher prices are not yet reflected.

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Yes, but how can you blame your bad performance on both harvest shortfall and excess inventory in the same year?

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they're not blaming excess inventory, rather sales weakness. pretty simple equation: poor sales = lower revenue. poor yield with fixed costs = higher cogs (honey is just honey, so presumably all stock has been valued upwards based on higher cost). basically they got it on both ends of the stick.

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I suspect there is impact from annoyed investors who felt Comvita were very slow in mentioning they were having a bad season when everyone else I know in the industry was saying since November conditions were poor. Seems like price sensitive information that management should have been all over.

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Another company that needs to lift it's game with keeping the market informed. Their beekeepers and management would have known months ago that harvest was going to be way down, along with revenue and profits.

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Downgrades come in 3's - this is the second one (and it's a doozy!), so expect one other one. Surprised the share prices is still anywhere near the 8's with all the shenanigans going on here...

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Cashflow must be getting critical - wonder how long they can hold out before needing to raise cash. Also wonder how tied into supply contracts they are if the sales side of the business doesn't recover but there is a bumper honey harvest next summer - i.e. is the inventory going to expand even further.

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Could be, that when it comes to the putative healing benefits of Manuka Honey, its chickens have come home to roost.

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