Comvita's share price soars as more honey equals more money

Comvita [NZX: CVT], the manuka honey and health products maker, is riding the crest of a consumer push for health and wellness products with its share price having risen 124% in the past year.

The Te Puke-based company attributes the soaring share price to its improved financial performance and a big surge in demand for manuka honey products. Australia's Capilano Honey and vitamin and health supplement company Blackmores have also seen their share prices go through the roof in the past year – 151% and 424% respectively, on the back of rising sales in China in particular.

Comvita now derives half of its revenue from China for its overall range, which includes products from manuka honey, olive leaf, and fish oil.

It was only four years ago that Comvita's board fought off a $71.6 million or $2.50 per share takeover offer from Singapore-based Cerebos Gregg, which lapsed when the bidder baulked at an independent valuation in the range of $3.40 to $4 based on forecast earnings. Comvita was trading today at $8.40 per share, having hit a record high of $8.80 on Tuesday this week.

Comvita chairman Neil Craig argued at the time the offer was opportunistic, given the company was emerging from a period of under-performance and had strong prospects.

He said the company is finally starting to deliver on its forecast promises with first-half sales jumping 53% to $91 million in the six months to September 30, as it turned to a $3 million profit from a $3.3 million loss a year earlier. In November it said full-year earnings would be at least 35% above the previous year to March 31 due to record sales.

Mr Craig, who is also a shareholder with a 3% stake, said the company now had a track record of delivering on its forecasts after previously failing to do so, even though that was hard to do when the market was growing so rapidly.

"We spent a lot of money upfront and we're now getting the returns and income starting to come in," he said.

Only two firms have analysts covering the stock – Edison Research, which is paid by Comvita, and Craigs Investment Partners, of which Craig is also chairman.

Comvita shares are currently trading at $8.40 and Craigs upgraded its target value by a whopping 75.4 per cent in November from $5.70 to $10 while Edison shifted from $7.16 per share to $9.20.

Craigs analyst Adrian Allbon said one of the key drivers for the huge re-rating of the share price was soaring demand for manuka honey products from Asian consumers in particular.

Securing supply has also been critical to building branded sales globally, he said. In 2010, Comvita produced only 5% of its manuka honey supply, which meant when world prices rose, it had to pay more to suppliers rather than capturing that value itself. It also found itself in the embarrassing position two years ago of running out of honey to supply its sales pipeline.

After investing heavily in vertical integration since, Comvita now produces half its supply, with the rest contracted, and has focused on ensuring it diversifies risk by having a better geographical spread of supply and that it produces more of the honey with a high-UMF factor, which costs the most and has the anti-bacterial activity required for its health products.

Raw material inventories at September 30 were also up 92% to $42 million, compared with $21.9 million at the end of the previous corresponding period and Edison's analysts said in a market where demand exceeds supply, increased raw material inventory is a positive indicator – "more honey equals more money".

"The question is what implications that has for second-half earnings and growth," Mr Allbon said.

Comvita has reaffirmed its five-year sales target of $400 million for the 2020/21 financial year. Mr Allbon said he was sceptical that the company would achieve its target for $120 million of that coming from its non-manuka honey products, as it will be "harder to capture earnings" from this portfolio.

Chief executive Scott Coulter agreed it would be harder but customers had indicated they wanted to buy other things from the company and the strategy was to broaden the range.

He's confident the clinical evidence it has invested in to prove the efficacy of its olive leaf extracts will pay off, and that the 19.9% strategic stake it invested last year in fish oil producer SeaDragon will show returns in a few years.

"Our goal is to partner with them and help create value for them," Coulter said. "There's no reason why we can't replicate the manuka honey story with fish oil."

(BusinessDesk)