Comvita beats earnings guidance, upbeat about FY18

Poor weather and a slowdown in demand from small exporters weighed on Comvita's annual result.

Comvita shares jumped 10 per cent after the natural health products company beat full year guidance and said it expects to return to an operating profit in the current financial year.

The Te Puke-based company, which uses Manuka honey, reported a net profit of $9.8m in the year to June 30 versus $18.5m in the audited accounts for the 15 months to June 2016 and versus guidance of $9m. The after-tax operating loss was $5.5m versus a profit of $17.1m in the audited accounts for the 15 months, versus its forecast of an after-tax operating loss of $7m.

The better-than-forecast result was due to a stronger-than-expected second half as the so-called "grey channel" showed signs of recovery. The channel is made up of small-scale exporters who buy the product and post it to China. However, moves by the Chinese government to crack down on grey or "diagou" sales has crimped profits for companies like Comvita.

Those sales, however, showed signs of life in the second half of the year. Australasian grey channel sales reached $25m the second half, double what they were in the first half and that momentum has extended into the new year, it said. "We have a real rebound in our grey channel sales," said chief executive Scott Coulter, although he noted it is not a full recovery. "Its a partial recovery of the grey channel," he said. That, coupled with significant permanent cost savings and other initiatives "provides us with a good deal of confidence as we head into 2018," he said.

Comvita is forecasting after-tax operating earnings to be at least equal to the after-tax operating earning of $17.1m achieved in the 2016 financial year - over the comparable 12-month period, said Coulter. He underscored, however, the result is depending on the honey harvest improving.

The company's shares rose 63 cents to $6.70, the highest since May 5.

Oyvinn Rimer, director and research analyst at Harbour Asset Management, said the market was upbeat about the better outlook statement for FY18 suggesting good momentum in the US and South East Asia, as well as normalisation in the honey harvest and grey channel momentum and also the fact that they are clearly suggesting "the trough is over and they expect the business to rebuild from here, through a range of measures."

Regarding the initiatives that will help spur growth in 2018, Coulter pointed to a number of new business opportunities that have allowed it to lift its 2018 revenue and profit forecast based on actual orders received and anticipated follow-on orders.

"During the past year we had a real issue with the core of our profitability with the grey channel so we have spent a lot of time building new business relations in South East Asia and in North America and you will see the benefits of that work come through in FY18," he said.

Its China joint venture became operational on July 1 and this will contribute immediately to underlying operating earnings, it said. "This JV also provides an advantage over our international competitors who have heavy dependency on the grey market channel to China which can be subject to regulatory change," it said. The business has sales of around $50m and "being on the ground in China is a key building block to our future growth strategy," said Coulter. "We remain extremely positive about our future growth prospects in this market."

Comvita said it would provide more detail about its strategy for the JV at its annual general meeting.

On another front, Coulter said revenue from new innovative products was $2.2m and it expects it to grow "considerably" in the current financial year. "We expect sales of greater than $10m based on new-to-the business innovation, based on the current run rate in the pipeline," he said.

Comvita said e-commerce will remain a key focus. Among other things, the company will create a new position of chief digital officer, responsible for a source-to-shelf strategy. It also said it is looking to "grow by acquisition," but did not provide any deal on what specific companies it is looking at.

The after-tax operating loss means that no final dividend will be paid but Comvita said it expects to recommence paying dividends after its first half result to December 31.