Comvita warns of first half loss on China regulatory changes

Published: Wed 26 Oct 2016 03:30 PM
Wednesday 26 October 2016 03:26 PM
Comvita warns of first half loss on China regulatory changes
By Fiona Rotherham
Oct. 26 (BusinessDesk) - Manuka honey and health products company Comvita has warned its first-half result is likely to be a loss after tough trading in the first quarter of the 2017 financial year resulted in an unexpected drop in sales.
At today’s annual meeting in Te Puke, the company said the lower than expected sales were the result of a slowdown in the New Zealand and Australian informal trade channels in China following regulatory changes, including a restriction on sales by individual traders and a new border taxation of 11.9 percent.
Comvita said it was starting to see these channels recover with sales now growing again on a monthly basis as traders adjust to the new rules but there will still be a loss in the first half result ending Dec 31.
The second half is expected to be profitable due to the seasonality of sales and the positive expected impact of its Kiwi Bee apiary business which has around 30,000 hives nationally and several thousand more under management.
Net profit after tax for the 2017 full-year is now expected to be similar to the $17.1 million in after-tax profit delivered in the 2016 financial year.
When the 2016 full-year result came out in August, chief executive Scott Coulter said it had experienced softer trading conditions but with direct access to the China market through a dedicated distributor, it expected to reduce the impact of any downturn in sales through the re-export channels.
Today the board and management said they remained confident of delivering strong long-term earnings growth on the back of a target of $400 million in sales by the 2021 financial year.
That strategy includes supply chain ownership and partnerships that connect customers directly to the source, growing direct-to-consumer channels through an increased marketing spend, and diversifying its ingredients platform through oil leaf extract and marine bioactives.
The company said it was focused on growing sales in new markets as well as new sales channels in existing markets given it had plenty of inventory on hand, compared to previous years when market opportunities were restricted by not having adequate supply.
Ongoing operating efficiencies had resulted in its cost base being lowered significantly compared to the prior year, though the company didn’t state by how much, primarily through a reduction in headcount and overheads in New Zealand. It now has 450 staff worldwide and chief executive Scott Coulter said some tough decisions had to be made on its overhead structure to “right-size the business”.
The cost-savings will have a positive impact on second half profit and beyond, the company said.
Comvita has strengthened its balance sheet by issuing 2 million shares at $10.60 per share with China Resources Ng Fung, taking the Shenzen-based Chinese food giant’s stake from less than five percent to 9 percent.
“This will be used to primarily strengthen working capital and provide funding to support several strategic initiatives currently under consideration,” the company said today.
The move gives it access to the China firm’s huge distribution network, with four thousand Chinese supermarkets, and help smooth out the supply chain volatility that has affected sales this year.
Over 60 percent of Comvita’s customers are Chinese which makes it an important market and “relationships in this market are critical,” said chairman Neil Craig.
Shares in Comvita dropped 3.3 percent to $10.30. They've gained 27.4 percent since the start of the year.

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