We were lucky to have the chance to interview the top management team of one of the hottest NZ listed companies: Comvita. As reported on Comvita website, they “are an international natural health products company backed by a strong New Zealand heritage. [They] are committed to the development of innovative natural health and well being products, backed by credible scientific research. Among their main products there is the famous Manuka Honey.
We report our exclusive conversation with the top management team. This is the second episode where we will discuss both the company’s financials and acquisition strategy. The first episode discussed the company’s strategy.
You were experiencing tremendous growth until 2016, but then growth stalled to pick up again in recent months.Where level of growth do you expect for the future (1/3/5 years)?
We have a long-term average CAGR of around 15% and our strategy should enable us to maintain this level of growth.
Comvita has a debt that is 4.5X Ebitda, do you see this as a risk, especially should a recession or higher rates materialize?
This is historically a high ratio for our business. Two key components to this ratio are EBITDA and net debt. Our net debt is higher than normal due to strategic procurement of inventory. Raw material inventories grew to $88m as we took a more aggressive approach to acquiring inventory. This is because:
– As retailers start to adapt to the new MPI regulations we want to be ready to take market opportunities when they present themselves.
– It has been the second poor season in a row and we were conscious of securing enough UMF Honey inventory early to satisfy our full year expectations.
If we return to a normalised honey season, we believe this will be rectified in the short term. Our usual target ratio of around 3.
A strategic focus on working capital management to reduce net debt will be a focus of the next financial year.
Rates might have a negative effect on your business considering that your current ROCE is 5.1%. Do you see this as a problem? Where would you look for higher yielding investment opportunities?
Yes, rates may have a negative effect on our business but with a return to a “normalised” honey season, ROCE will see a steep climb and the cost of interest is less material to a ROCE.
The stock is near a 2-year bottom and is pretty volatile. How do you explain this situation?
The basic reason for the stock volatility over the past couple of years is as a direct correlation to the financial performance of the company over the same time. The performance over the last couple of years has demonstrated that there is inherent agricultural risk in our stock which we believe has also been costed in.
Margins have been shrinking over the last few years. Why this is the case and what is your expectation going forward? Do you have a plan to expand margins?
Gross margins have been heavily influenced in the last two years from poor weather patterns, which result in Comvita’s account showing all this loss in the gross margin area.
The underlying gross margin for our Brand business continues to hold at strong levels. Underlying brand business performed well in FY18. NPAT improved from $1.1m to $15.5m.
Your discussions around a potential sale of the business did not yield a sale. Is there an update on that?
The subsequent discussions between Comvita and that third party concluded with no agreement on a transaction. In negotiations we could not bridge the considerable distance between us on price and therefore, Comvita Directors unanimously agreed to withdraw from the process.
On the positive side, a great deal of insight was gained during the due diligence process which will be invaluable for Comvita in realising our strategy over the long term.
Have you been approached by other companies for a potential sale of the company?
As a publicly listed company we often get approaches which the Chairman of the Board and the Board review. However,without a demonstrable benefit to the company and shareholders, most of these enquiries do not progress.
Would you consider selling only parts of the business (e.g. Supply co)?
The Board and Management regularly review all aspects of the business, including the structure of the Brand and Supply functions. These considerations are always reviewed in terms of what is in the best interest of shareholders.
- May contain projections or forward-looking statements about Comvita. Such forward-looking statements are based on current expectations and involve risks and uncertainties. Comvita’s actual results or performance may differ materially from these statements;
- Includes statements relating to past performance, which should not be regarded as a reliable indicator of future performance;
- Is for general information purposes only, and does not constitute investment advice;
- Is current at the date of providing these answers, unless otherwise stated.