No need to raise capital: Comvita chairman Neil Craig

Comvita has significant bank headroom, says chairman Neil Craig. Photo / File

The Comvita chairman is adamant the company can navigate through a third consecutive poor honey season without raising capital despite forecasting a $6 million loss.

However, Neil Craig acknowledges investors are concerned after the natural health products company issued another profit warning yesterday.

"Raising capital is an option for us, but it's not necessary," Craig told the Herald when asked about the pressure building on Comvita's balance sheet amid high debt and falling earnings.

"We have significant bank headroom … we said that at the half-year announcement because we know it's a perceived issue. But it's not an issue for the board and it's not an issue for the company and it's certainly not an issue for the bank."

Comvita shares fell 14.5 per cent yesterday to $3.58 after the company warned the market of an expected $6m loss for the year.

The stock is now down 46 per cent in the past 12 months. In May 2016 it was trading as high as $13.

Comvita chief executive Scott Coulter said poor honey production for the third season in a row was "extremely disappointing" given it has been moving its apiary business to a more variable cost model.

It will look to change the direction of the business unit before the next season.

Comvita is now reviewing its apiary business operations and under-performing assets.

Craig said the company was reviewing its apiary business operations and under-performing assets, withdrawing from sites that have become non-viable due to overcrowding, and moving hives to where there are large tracts of mānuka.

While honey production per hive was higher than the previous year, poor weather patterns saw lower production overall. Comvita also blamed over-crowding of mānuka sites with hives by competing beekeepers, "most notably" in Northland and East Cape.

Comvita has invested heavily in its own plantations, which it says will produce "material quantities" of honey over the next two to three years.

Craig said the company could not rely on a better season next year and simply needed to make profits.

As at December 31 the company's net bank borrowing was $104m, while total inventory had climbed to $120m.

The company has borrowed to purchase high UMF mānuka honey inventory, which it says provides the business with secure, high-quality honey supply which will grow in value while in storage.

"I liken it to a wine business or an agriculture business where harvesting takes place – the debt is roughly matched by inventory," Craig said.

"And inventory in terms of the honey industry actually increases in value. It doesn't decrease, that's a naturation thing, a bit like wine. I think there's a general lack of appreciation of that."

Comvita's borrowings had also gone up due to investment in assets and infrastructure, including a new warehouse and a 20 per cent stake in Apiter, a supplier of propolis in Uruguay.

"The reality is we could raise capital, we don't need to raise capital. We need to make profits so we can pay interest and pay dividends."

In February Comvita reported a first-half net loss of $2.7m as the planned shift to more formal sales channels was taking longer than expected.

Analysts were underwhelmed by the performance and remain frustrated by profit guidance predictions being consistently wide of the mark.

They have also queried Comvita's move away from the unofficial grey trading channel into China — the channel that propelled it into the limelight initially.

However, Comvita highlighted yesterday that it now has greater control over sales channels and in-market pricing.

It had acquired 100 per cent of a China joint venture and secured a direct trading relationship with the last of the major cross border e-commerce platforms into China.

"We are now achieving consistent and growing monthly revenue at improved margins," it said.

"In retrospect, while we have been implementing these strategies, we have underestimated how difficult in time and resource commitment it is to achieve pricing alignment and build direct contractual relationships with all the major e-commerce channels into China."

Comvita said benefits won't be obvious until the 2019-2020 year.

"We are getting there but it's taking longer than we would like," Craig said.

The Comvita story:

• Established in 1974 by Claude Stratford, soon joined by business partner Alan Bougen. Initially sold bee products from Stratford's home in Paengaroa, in the Bay of Plenty.

• Today sells mānuka honey, skincare, wound dressings and other products, with almost 80 per cent of revenue coming from overseas markets.

• Listed on the NZX in November 2003, when shares traded at $2.14.

• In 2011, fought off takeover offer from Singapore-based Cerebos Pacific, which wanted to buy Comvita for about $72m, or $2.50 a share. Comvita's board called the bid opportunistic, and said it undervalued the company.

• In April 2018, revealed that an unnamed party was assessing the company, with an eye to a possible takeover or other deal. In May, Comvita said that process was over because: "We could not bridge the considerable distance between us on price."

• At its peak, the company was valued at more than $580m, but today its market capitalisation is about $200m.

• Biggest after-tax profit was $17.2m, for the 12 months to March 2016.

• Latest half-year result, for the six months to December 31, 2018, was an after-tax loss of $2.7m on revenue of $77.7m.

• Has invested in improved varieties of mānuka, to provide food for bees.