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Current as of 02/12/16 07:39PM NZST
The Business Herald’s markets and banking reporter.

Stock Takes: Natural products 'a hot space'

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Majority owner Walker Zhong has more than tripled the value of his stake. Photo / Christopher Adams
Majority owner Walker Zhong has more than tripled the value of his stake. Photo / Christopher Adams

Could newly listed health supplements maker Oceania Natural be benefiting from the Blackmores effect?

Shares in the Auckland-based firm, which joined NZX's new NXT market last week, have soared since their March 31 listing, rising from an issue price of 64c to an intra-day peak of $2.65 on Tuesday.

They opened at $2.25 yesterday, giving the company a market capitalisation of $57.8 million. The shares are tightly held, with low liquidity exaggerating movements in the stock.

Still, the rally's been a boon on paper for the firm's chief executive and majority owner, Walker Zhong, more than tripling the value of his 62 per cent stake, which is locked in escrow until early 2018, from $10.2 million at listing to $35.9 million yesterday morning.

Watch: video of yesterday's Oceania Natural NXT listing ceremony:

Video

The company manufactures and markets food and supplement products, mostly in China, sourced from New Zealand and the Cook Islands using manuka honey and noni fruit, sold under its Rich Garden branding.

The natural products export sector is very much in vogue with Australasian investors given strong Chinese demand for such products, which goes some way towards explaining the surge in Oceania's stock price.

ASX-listed Blackmores, for example, has become one of Australia's hottest stocks, gaining 230 per cent over the past year, to open at A$191.45 yesterday.

Shares in the biggest listed player in the natural products sector on this side of the Tasman, Comvita, have been having a strong run and the company is expected to enter the S&P/NZX50 index, where it would replace Diligent Corp if a takeover of the software firm goes ahead.

"It's definitely a hot space," Mark Devcich, head of research at Auckland's Pie Funds, said of the natural products sector.

But he questioned whether Oceania Natural's valuation was getting ahead of itself, given the company expected to report total revenue - including sales generated through third party channels - of only $3.4 million in the year to March 31, 2016, rising to $5.4 million in the following year.

"It's got some big expectations to support its valuation," Devcich said.

Risky play

Oceania is at the high end of the risk scale given the reliance it has on a market famous for its volatile regulatory environment, particularly when it comes to food products.

A strike of a pen in Beijing can spell disaster for such businesses, illustrated by the many small-scale New Zealand infant formula exporters who have gone bust in recent years following changes to import rules.

Asked about this during an interview following last week's listing, Zhong said: "That's our stress."

However, given his and others' backgrounds in the company - before moving to New Zealand in 2013 he held senior management roles in China with multinationals in the consumer goods space including PepsiCo and Tetra Pak - Oceania was well-placed to weather changes in the Chinese regulatory landscape.

"Sometimes they will change the regulations in China but we know how to deal with new regulations and how to control our risk."

Boost for NXT

Tim Preston, of NXT adviser CM Partners, says Oceania's market debut - which he was involved with - has been a "shot in the arm" for the new market that launched in the middle of last year.

"What has surprised us is the number of inquiries we've had off the back of that from other like-minded companies saying maybe NXT is a good option for us," he said.

Many questions have been asked about whether the new market, aimed at fast-growing firms in the $10 million to $100 million valuation range, will secure the listings it needs to become a success.

"A lot of the commentary around [NXT] since the listing of Oceania has been a lot more positive," Preston said. "I think that was what the market needed - it needed a shot in the arm from a good listing like this."

- NZ Herald

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The Business Herald’s markets and banking reporter.

A business journalist for more than four years, he also writes the weekly Stock Takes column.Christopher’s main focus is the local sharemarket and issues facing Kiwi investors. He covered manufacturing and retail in his previous Herald role and maintains a special interest in New Zealand’s growing trade relationship with China.

Read more by Christopher Adams

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