WEEKLY STOCK COMMENT: COMVITA
Roy Davidson, 23 August 2018
Comvita (CVT) is New Zealand’s largest integrated producer and marketer of honey and bee related products. The company also owns an olive leaf extract business in Australia and distribution businesses in Asia and the UK, with marketing outlets in 14 countries. CVT is New Zealand’s only listed natural healthcare company, with a product range encompassing healthcare, functional foods, medical and skincare. CVT’s head office is located in Paengaroa.
Asia, and in particular China, is a key source of demand with food safety and health a major issue in the region. Overall, CVT estimates that around 60% of sales globally end up with a Chinese consumer. This is a strong demand thematic with the Chinese middle class growing, however, recent moves by the Chinese Government to clamp down on ‘grey channel’ sales (products bought oversees and sold in China) has dampened sales. The company has a strategy to grow direct distribution in China, but this will take time.
CVT recently announced the establishment of a distribution joint venture with its existing Chinese distribution partner Shenzhen Comvita Natural Food Co. This offsets a degree of regulatory risk and reliance on ‘grey channel’ sales. It also enables the company to capture a share of the distribution margin when selling direct to the Chinese consumer. Shenzhen Comvita Natural Food Co has been operating for 12 years, employs 200 people, and has over 400 branded CVT stores or kiosks throughout China.
Earlier in the year CVT stated that it expected its honey harvest would be below average following a wetter than usual February. CVT subsequently updated the market saying that weather conditions had continued to be adverse and that honey yields were well below expectations by around half. This saw the company lower full year earnings guidance by $8m to $8-11m and again highlighted the weather risks faced by the business.
An ageing population and a general consumer focus on health will drive demand for CVT’s products. International markets account for 80% of sales, which demonstrates CVT’s global reach. CVT has invested heavily in the business over the last several years as it looks to grow the brand, secure supply, and expand its processing capacity. We view this revised strategy positively and CVT's earnings should grow substantially over the long-term. Nearer-term weather impacts and the Myrtle Rust scare serve as a reminder that CVT is exposed to agricultural risk.
Risks to CVT include: 1) adverse weather, 2) regulatory change in key sales channels 3) increased competition.