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NZ Stock Opportunity - Comvita

By Tom McBride, Investment Adviser

COMVITA

Comvita is a vertically integrated natural health product company. It specialises in honey based products, with a particular focus on Manuka honey. More recently, the company has transitioned into other natural health product categories, including Olive Leaf extract, Omega 3, dairy, and eye-healthcare markets. In addition to natural
health products, Comvita launched Medihoney Adhesive Dressings for minor wounds, burns, cuts & grazes. The adhesive dressing market is valued in excess of $1 Billion.

Comvita generate sales globally, with Australia, Asia, UK/Europe, and the USA representing key markets.

China remains a focus for the Comvita sales team. This has been supported by a joint venture between Comvita and China Resources Ng Fung Ltd, where Comvita hold a 51% shareholding. The focus is sales activity through e-commerce channels JD.com and Tmall, retail stores, as well as access to 45 wholesalers across China.
North America and Canada have more recently become a key market for Comvita. Amazon.com and Costco are the two primary channels for distribution, while Comvita is currently negotiating with another potential North American channel.

Comvita enjoyed a quick rise to fame through 2015, ending in May 2016, after rising from $4 per share to $12.87, before falling 60% to $5.18 per share. This fall from grace was the result of a lower than usual honey harvest, the discovery of myrtle rust in the North Island, and a drop-off in grey channel sales during the 2017 financial year. Around 50% of last year’s earnings decline was driven by the loss reported from Comvita’s apiary business.

First quarter sales for the 2018 financial year reflect a higher level of consumer confidence and an active sales team. First quarter sales for 2018 increased 35% on the same period last year, supported by an increase in grey channel sales and strong sales activity in Canada & North America. Comvita updated the market in October to indicate they expect profit to exceed earlier indications of $17.1m.

Innovation equates to value, and Comvita have proven themselves to be adept at continuous innovation. Newly introduced products include those products sourced from Bilberry & NZ blackcurrant extract, kiwifruit supplements & snacks, and an apple cider drinking vinegar with Manuka honey. Comvita have expanded their product range to include products sourced from natural ingredients not exclusive to 

Manuka honey. In addition to the products listed above, the next step for Comvita involves developing a range of probiotics. Increasing the diversity of their product range has reduced the company’s risk profile and supports their profile as the leader in natural health products.

There are a few key risks facing Comvita, these include adverse weather events, myrtle rust and the definition of Manuka honey.

The risk of adverse weather events is tough to manage and is merely a reality of working in agriculture. At this stage, we will have a better idea of how recent weather events have impacted their 2018 harvest in the New Year.

In regards to Myrtle Rust, Comvita CEO Scott Coulter announced in June that the company believe the overall risk to the overall NZ Manuka honey industry is low. This expectation is largely based on the experiences of Capilano dealing with Myrtle Rust being present in Australia since 2010 and Tasmania since 2015. Nonetheless, Comvita have implemented a number of initiatives, from the nursery to the field, to identify and prevent the spread of this particular fungi.
In April 2017, the Ministry for Primary Industries (MPI) released to the industry their proposed Manuka honey definition and invited submissions. While Comvita are supportive of introducing regulatory standards, the definition proposed by MPI did not deliver the level 

of confidence needed by the industry. Since the announcement in April, Comvita has worked closely with Apiculture New Zealand to prepare a submission on behalf of the industry to MPI, outlining the concerns in the proposal and the changes required. Comvita has also been represented in numerous meetings with MPI and industry representatives. Those discussions resulted in an updated definition proposed by the industry, which is under consideration by MPI.

Comvita have displayed a high level of proactive risk management with regard to the risks noted above, and it’s expected that their market presence should be sufficient to achieve a Manuka honey definition that is consistent with the research already carried out by Comvita. Comvita currently trade at $7.45 per share. CVT is trading on an FY18 PE of /approximately 18.5, broadly in line with the average of comparable Australasian Food, Beverage, Agri stocks.

WHERE DOES COMVITA FIT INTO PORTFOLIOS?

Our Investment Committee have defined Comvita as peripheral equity. This means we look to hold Comvita in portfolios up to a maximum
of 5% of the portfolio. The reason for this restriction relates to the size of the company, volatility in earnings, and their cash flow. We believe Comvita represents a valuable long term growth investment for client portfolios, provided clients understand the risks involved.

Filed under Newsletter \ Tom McBride

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