Comvita shares slump as honey products maker tips loss

Comvita shares dropped 11% after the manuka honey and health products maker warned a first-half loss was on the cards.

Chief executive Scott Coulter has described the predicted loss as a "blip."

The company told shareholders at its annual meeting in Te Puke that a loss was likely when its six-monthly results are announced in February because of a fall-off in sales out of Australasia since Chinese authorities cracked down on grey market traders.

Comvita shares slumped to $9.44, leading the S&P/NZX 50 Index lower.

A return to profit is expected in the second half due to the seasonality of sales to the northern hemisphere, which rise during their winter, and a positive impact during the southern hemisphere summer from Comvita's Kiwi Bee apiary business, which has about 30,000 hives nationally and several thousand more under management.

Ongoing operating efficiencies, primarily through a reduction in headcount and overheads, resulted in significantly lower costs compared to the previous year, although the company didn't say by how much.

Mr Coulter says it has laid off 23 staff from its New Zealand head office in order to "right-size" the business but overall staff numbers of 450 worldwide have been maintained with more staff being hired for its apiary business.

The cost-savings will have a positive impact on second half profit and beyond, the company says.

Net profit for the 2017 year is now expected to be similar to the $17.1 million delivered in the 2016 financial year.

Mr Coulter says Comvita wasn't the only company affected by the change in Chinese rules with traders tending to sell a range of dietary supplements, infant formula and honey.

"No-one is immune to it," he says.

Trading done that way had grown quickly before the Chinese authorities slapped an 11.9% imposition tax on these products which has slowed demand because of the higher cost.

"We're expecting it will shake itself out and we can already see that," Mr Coulter says.

Sales in those channels have now started growing again on a monthly basis as traders adjust to the new rules.

After questioning from the New Zealand Shareholders' Association, shareholders re-elected director Luke Bunt, the chief executive of children's clothing retailer Pumpkin Patch which has been tipped into receivership by its lenders and appointed voluntary administrators after failing to reinvent itself in the face of shrinking sales and too much debt. Murray Denyer, who was appointed during the year, was also elected to the board.

Mr Coulter says he and the board remain confident of delivering strong long-term earnings growth on the back of a target of $400 million in sales by the 2021 financial year.

That strategy includes supply chain ownership and partnerships that connect customers directly to the source, growing direct-to-consumer channels through an increased marketing spend, and diversifying its ingredients platform through oil leaf extract and marine bioactives and other innovation.

Some 65% of Comvita's revenue is derived from functional foods, 25% from healthcare, 6% from medical, and 4% from personal care.

This month the company launched a dietary supplement for eye health, one of the largest health concerns in Asia, that is based on New Zealand-sourced blackcurrants which have high levels of anthocyanins.

Mr Coulter says the strategy involves innovation which is likely to deliver new products in the next year from kiwifruit which is known for its digestive benefits, probiotics, and milk containing fish oil that will be targeted at brain development in young children.

Comvita has strengthened its balance sheet by issuing 2 million shares at $10.60 each for a total $21.2 million with China Resources Ng Fung, taking the Shenzen-based Chinese food giant's stake from less than 5% to 9%.

China Resources has no intention of seeking a full takeover because it sees value in the company being New Zealand-owned and operated, Mr Coulter says.

"These guys have scale and have said they want to help, That's a great position for a relatively small Kiwi company." 

More than 60% of Comvita's customers are Chinese and the move gives it access to the China firm's huge distribution network, with 4000 Chinese supermarkets – many of them high end.

In September, Comvita also formed a 51:49 joint venture in China with its long-term distribution partner Shenzen Comvita Natural Food Co. Comvita has a history of building up exclusive distribution positions globally and then acquiring them back when it feels the time is right.

Under the deal, Comvita will issue 2.8 million shares at $10.60 per share to acquire the 51% shareholding, which values the joint venture business at $30 million.

(BusinessDesk)