Jenny Ruth: Comvita in sticky patch over forecast

Comvita chief executive Graeme Boyd says the outlook for the company, based in Paengaroa, near Te Puke, is 'all very positive'. Picture / Greg Bowker

It's never a good look for a company to fail to meet its own forecasts. In honey health products company Comvita's case, the expected discrepancy is vast: in late July, when it released its first-half results, it said it expected to meet its $1.58 million net profit for the full year, as forecast in its prospectus.

By mid-November, it told the market it expected to report a full-year net profit of only $1.1 million, a third less than the forecast. You could certainly criticise the company for not letting the market know earlier.

The shares had already declined from their peak at $2.70 to $2.35 before the profit warning, and have since declined to $2.10.

One consolation for investors is that's still above its May "subsequent public offering" price of $2.05 a share. (The issue raised $7.5 million.)

Fisher Funds Management is one of the AX listed company's major shareholders with 9.8 per cent. Carmel Fisher says she is "a little bit disappointed" but hasn't changed her view on the company's prospects.

"It's a bit of the nature of the company. It's not going to be straight-line growth.

"We don't think it's next year's success story. We think it's a two- to three-year success story. We can live with some earnings variability."

Fisher also excuses the company on the grounds of its inexperience and thinks its communication will improve. Comvita shares had previously traded on the old "unlisted" USM market since September 2002 and was one of the "first XV" to list on the AX last November.

And the profit shortfall isn't as bad as it looks. The company blamed the impact of the high dollar on its exports - now nearly half its production - and the delayed launch in New Zealand of its manuka honey wound dressings.

Chief executive Graeme Boyd says the company's underlying performance has been the same throughout the year and that only the gaining of its first order in China has enabled it to report an 11.5 per cent increase in first-half net profit.

The "six-figure" order was to supply the China Duty Free Group, which has more than 200 outlets.

Boyd expects that customer will re-order, but not this year. Comvita's products are only in about a dozen of the outlets so far, he says.

"It's all very positive. It just comes in lumps, that's all."

Although about half the company's production is sold in New Zealand, Asian tourists are big buyers and a number of the local outlets also do mail-order sales to Asian countries.

Boyd estimates about half the company's domestic sales find their way overseas, one way or another.

He says that part of the business is being hurt most by the high currency. The statistics show that Asian tourists keep coming to New Zealand, but Boyd believes they have less disposable income to spend on items such as Comvita's products.

While Sars gave the company's sales a boost last year, that wasn't a one-off effect.

"In a place like Hong Kong, it opened up and established an awareness of some of our products. Sure, you're not getting the same hype in terms of product purchase, but it hasn't dropped back to where it was before Sars came along," he says.

Overall, Boyd says it is impossible to quantify the impact of the currency.

And the more serious impact on the profit shortfall was from the medical division. Comvita bought Bee & Herbal and its subsidiary, Apimed Medical Honey, between September and December last year. Apimed holds patents developed by Waikato University for its wound dressings.

Boyd estimates delays in that part of the business will shave about $500,000 off the net result this year.

"We had an expectation that we would have the dressings on the [New Zealand] market by the second quarter. As it turned out, it was the fourth quarter. What we had forecast in 2004 is going to happen in 2005."

Britain provided Apimed with its first export order, from wound care manufacturer Brightwake in March.

Regulatory approvals have also taken longer than Comvita expected. Sales under the company's own brand in Britain will not start to come through until next year, compared with the company's expectation of a launch in the middle of this year.

"What we're discovering here is that it's a different business from fast-moving consumer goods. Things go at a much more measured pace.

"The dressings business hasn't materialised in the time-frame we were expecting, but it's still happening," Boyd says.

While Comvita is still learning about its new business, it isn't stretching its resources.

"We're coping quite well. It is absorbing resources, but we always knew that it was going to."

But Boyd thinks it's fair to say that there was a degree of indigestion.

One aspect of the company which does cause me some concern is that despite its reporting profits, it was cashflow negative last year (by $3.1 million) and in the first-half of this year (by $1.68 million).

The main reasons for that are the company's growth rate and big increases in its stocks of manuka honey.

Back in 2002, the company suffered from a shortage of manuka honey and had to restrict its sales worldwide by 50 per cent. It doesn't want to find itself in such a frustrating position again and so is ensuring it will have enough stocks to weather another bad honey season.

Last year was a bumper year for honey, but this year was average to below-average.

This policy also meant Comvita avoided wild fluctuations in manuka honey prices.

ABN Amro Craigs, which sponsored Comvita's listing on the AX, is forecasting the cashflow position will return to positive for the full 2004 year and will continue to be positive next year and the year after.

It is also forecasting a $1.6 million net profit for next year and a $1.9 million result the following year.

But Comvita has proved cash- hungry. It raised $1.035 million in February 2001 through a one-for-five rights issue at $1 a share, and $1.808 million in August 2002 through a one-for-four rights issue priced at $1.15 a share, as well as this year's $7.5 million issue.

Boyd says being listed on the AX has been much better for the company than the USM, particularly in raising Comvita's profile, although he said the high in the share price this year was the result of hype.

The stock exchange's figures show the average trading in Comvita shares on the USM was $20,445 a week but on the AX board that has jumped to $118,750 a week.