Oceania Natural — Variation from key operating milestones

Oceania Natural — Variation from key operating milestones

Oceania Natural (ONL) is an early-stage New Zealand company involved in producing and distributing natural food and diet supplements sourced from New Zealand and the Pacific Islands, and sold both domestically and in the People’s Republic of China. The company has announced that the board has approved a “one off” sale of manuka honey to a distributor at a reduced margin. As a result, operational performance is likely to vary by more than 10% from the targeted key operating milestones (KOMs) for the year to March 2017.

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Oceania Natural

Variation from key operating milestones

Consumer goods

NZX Company Spotlight

3 April 2017

Price

NZ$1.43

Market cap

NZ$37m

Share price graph

Share details

Code

ONL

Listing

NXT

Shares in issue

26.2m

Business description

Oceania Natural is a producer, distributor and reseller of natural food and supplement products sourced from New Zealand and the Pacific Islands, sold predominantly into the People’s Republic of China. Its chief products are manuka honey and related products, Noni juice and dietary supplements.

Bull

Tapping into demand for clean NZ products.

Huge market potential in China.

Board has strong experience in consumer products companies.

Bear

Price competition.

Regulatory constraints in China.

Small player competing with large incumbents.

Analysts

Paul Hickman

+44 (0)20 3681 2501

Sara Welford

+44 (0)20 3077 5700

Oceania Natural (ONL) is an early-stage New Zealand company involved in producing and distributing natural food and diet supplements sourced from New Zealand and the Pacific Islands, and sold both domestically and in the People’s Republic of China. The company has announced that the board has approved a “one off” sale of manuka honey to a distributor at a reduced margin. As a result, operational performance is likely to vary by more than 10% from the targeted key operating milestones (KOMs) for the year to March 2017.

“One-off” sale approved

As we noted in our January 2017 Spotlight report, ONL removed Q4 manuka honey sales to Chinese distributors from its FY17 KOM targets after being unable to reach agreement on selling prices with those distributors. This followed an extended period of competitive discounting for manuka honey products in Chinese markets. The board has now approved a “one off” sale of manuka honey to a distributor at a reduced margin. The effect of this is a switch from the direct sales channel to the distributor channel with a net expected over-achievement against the targeted revenue for FY17, but at a reduced gross margin.

Distributor sales higher than target

Total revenue for FY17 is likely to be in the range of NZ$2.25 -2.40m, compared to the FY17 KOM target of NZ$2.22m, an increase of NZ$30,000-180,000. Within this, distributor sales are expected to increase by NZ$295,000-345,000 and direct sales to decrease by NZ$165,000-265,000 compared with the KOM targets. The changes in expected revenue are set out in Exhibit 1 on page 2.

Lower gross margin expected

Although the “one-off” sale agreement has the effect of increasing total revenue, it will result in a lower gross margin due to the change in sales channels. This is expected to be in the range of 26-32% compared with the KOM target of 40%.

Valuation: Share price implies 15-16x FY17e EV/sales

Since listing on the NXT on 31 March 2016, ONL’s share price has more than doubled, although it is now just over half its October 2016 high. The current price implies an EV/sales multiple of 10.8x FY16 sales and 15-16x the expected FY17e sales. This is well ahead of the 2.3x average of its well-established listed peers (see Exhibit 2).

Historical performance

Year
end

Revenue
(NZ$000s)

EBITDA
(NZ$000s)

EBIT
(NZ$000s)

NPAT
(NZ$000s)

Net cash
(NZ$000s)

Net assets
(NZ$000s)

03/15

1,512

45

20

1

4

(65)

03/16

3,351

305

276

183

(736)

1,874

Source: Oceania Natural

Oceania Natural coverage is provided through the NZX Research Scheme

Expected outturn against key operating milestones (KOMs)

We set out below the expected outturn compared with the KOMs:

Exhibit 1: Expected FY17 outturn against KOMs

NZ$000s

KOM

Current expectation

+/(-)

Total revenue

2,220

2,250-2,400

30-180

Direct sales

1,615

1,350-1,450

(165)-(265)

Distributor sales

605

900-950

295-345

Gross margin (%)

40

26-32

(8)-(14)

Source: Oceania Natural, Edison Investment Research

Peer comparison

ONL’s listed peers are predominantly Australian and New Zealand honey and health products companies. They are well-established companies in more mature stages of their lifecycles. We note that multiples at Comvita are exceptionally high as a result of its own issues with sales channels into China combined with an exceptionally poor harvest in 2016/17.

Nevertheless, the average EV/sales multiple of this group of 2.3x (Exhibit 2) is well below the EV/sales multiple implied by ONL’s current market capitalisation. With a market capitalisation of NZ$37m and net cash of NZ$1.4m at 30 September 2016, the EV/sales multiple on ONL’s actual sales for FY16 is 10.8x, while the EV/sales multiple implied by ONL’s range of expected FY17e revenue is 15-16x.

Exhibit 2: Peer comparison based on 12-month forward consensus

Company

Country

Currency

Price

Market cap
(m)

P/E
(x)

EV/sales
(x)

EV/EBITDA
(x)

EBITDA
margin (%)

Operating margin (%)

Blackmores

Australia

A$

112.9

1,945

28.3

3.0

18.4

17.8

15.9

Capilano Honey

Australia

A$

14.18

134

13.1

1.1

9.1

11.9

10.5

Comvita

New Zealand

NZ$

8.6

365

74.8

2.8

24.7

11.3

6.3

Average

 

39

2.3

17.4

13.7

10.9

Source: Bloomberg; Note: Prices as at 30 March 2017.

Edison is an investment research and advisory company, with offices in North America, Europe, the Middle East and AsiaPac. The heart of Edison is our world-renowned equity research platform and deep multi-sector expertise. At Edison Investment Research, our research is widely read by international investors, advisers and stakeholders. Edison Advisors leverages our core research platform to provide differentiated services including investor relations and strategic consulting. Edison is authorised and regulated by the Financial Conduct Authority. Edison Investment Research (NZ) Limited (Edison NZ) is the New Zealand subsidiary of Edison. Edison NZ is registered on the New Zealand Financial Service Providers Register (FSP number 247505) and is registered to provide wholesale and/or generic financial adviser services only. Edison Investment Research Inc (Edison US) is the US subsidiary of Edison and is regulated by the Securities and Exchange Commission. Edison Investment Research Limited (Edison Aus) [46085869] is the Australian subsidiary of Edison and is not regulated by the Australian Securities and Investment Commission. Edison Germany is a branch entity of Edison Investment Research Limited [4794244]. www.edisongroup.com

DISCLAIMER
This report has been commissioned by NZX Limited (“NZX”) and prepared and issued by Edison Investment Research (NZ) Limited (“Edison”). This report has been prepared independently of NZX and does not represent the opinions of NZX. NZX makes no representation in relation to acquiring, disposing of or otherwise dealing in the securities referred to in this report.

All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however neither NZX nor Edison guarantees the accuracy or completeness of this report. Opinions contained in this report represent those of the research department of Edison at the time of publication. The securities described in this report may not be eligible for sale in all jurisdictions or to certain categories of investors. This research is issued in Australia by Edison Australia and any access to it, is intended only for "wholesale clients" within the meaning of the Australian Corporations Act. This research is distributed in the United States by Edison US to major US institutional investors only. Edison US is not registered as an investment adviser with the Securities and Exchange Commission. Edison US relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940 and corresponding state securities laws. As such, Edison US does not offer or provide personalised advice. This research is distributed in New Zealand by Edison). Edison is the New Zealand subsidiary of Edison Investment Research Limited. Edison is registered on the New Zealand Financial Service Providers Register (FSP number 247505) and is registered to provide wholesale and/or generic financial adviser services only. The distribution of this document in New Zealand is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the New Zealand Financial Advisers Act 2008 (FAA) (ie without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision. Edison publishes information about companies in which we believe our readers may be interested, for informational purposes only, and this information reflects our sincere opinions. This report is not intended to be, and should not be construed in any manner whatsoever as, personalised advice. Also, this report should not be construed as a solicitation or inducement to buy, sell, subscribe, or underwrite any securities referred to in this report. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. Edison has a restrictive policy relating to personal dealing. Edison does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report. Edison or its affiliates may perform services or solicit business from any of the companies mentioned in this report. The value of securities mentioned in this report can fall as well as rise and are subject to large and sudden swings. In addition it may be difficult or not possible to buy, sell or obtain accurate information about the value of securities mentioned in this report. Past performance is not necessarily a guide to future performance. Forward-looking information or statements in this report contain information that is based on assumptions, estimates of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations. To the maximum extent permitted by law, NZX, Edison, either of their affiliates and contractors, and their respective directors, officers and employees will not be liable for any loss or damage arising as a result of reliance being placed on any of the information contained in this report and do not guarantee the returns on investments in the products discussed in this publication.

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

245 Park Avenue, 39th Floor

10167, New York

US

Sydney +61 (0)2 8249 8342

Level 12, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

245 Park Avenue, 39th Floor

10167, New York

US

Sydney +61 (0)2 8249 8342

Level 12, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

Edison is an investment research and advisory company, with offices in North America, Europe, the Middle East and AsiaPac. The heart of Edison is our world-renowned equity research platform and deep multi-sector expertise. At Edison Investment Research, our research is widely read by international investors, advisers and stakeholders. Edison Advisors leverages our core research platform to provide differentiated services including investor relations and strategic consulting. Edison is authorised and regulated by the Financial Conduct Authority. Edison Investment Research (NZ) Limited (Edison NZ) is the New Zealand subsidiary of Edison. Edison NZ is registered on the New Zealand Financial Service Providers Register (FSP number 247505) and is registered to provide wholesale and/or generic financial adviser services only. Edison Investment Research Inc (Edison US) is the US subsidiary of Edison and is regulated by the Securities and Exchange Commission. Edison Investment Research Limited (Edison Aus) [46085869] is the Australian subsidiary of Edison and is not regulated by the Australian Securities and Investment Commission. Edison Germany is a branch entity of Edison Investment Research Limited [4794244]. www.edisongroup.com

DISCLAIMER
This report has been commissioned by NZX Limited (“NZX”) and prepared and issued by Edison Investment Research (NZ) Limited (“Edison”). This report has been prepared independently of NZX and does not represent the opinions of NZX. NZX makes no representation in relation to acquiring, disposing of or otherwise dealing in the securities referred to in this report.

All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however neither NZX nor Edison guarantees the accuracy or completeness of this report. Opinions contained in this report represent those of the research department of Edison at the time of publication. The securities described in this report may not be eligible for sale in all jurisdictions or to certain categories of investors. This research is issued in Australia by Edison Australia and any access to it, is intended only for "wholesale clients" within the meaning of the Australian Corporations Act. This research is distributed in the United States by Edison US to major US institutional investors only. Edison US is not registered as an investment adviser with the Securities and Exchange Commission. Edison US relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940 and corresponding state securities laws. As such, Edison US does not offer or provide personalised advice. This research is distributed in New Zealand by Edison). Edison is the New Zealand subsidiary of Edison Investment Research Limited. Edison is registered on the New Zealand Financial Service Providers Register (FSP number 247505) and is registered to provide wholesale and/or generic financial adviser services only. The distribution of this document in New Zealand is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the New Zealand Financial Advisers Act 2008 (FAA) (ie without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision. Edison publishes information about companies in which we believe our readers may be interested, for informational purposes only, and this information reflects our sincere opinions. This report is not intended to be, and should not be construed in any manner whatsoever as, personalised advice. Also, this report should not be construed as a solicitation or inducement to buy, sell, subscribe, or underwrite any securities referred to in this report. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. Edison has a restrictive policy relating to personal dealing. Edison does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report. Edison or its affiliates may perform services or solicit business from any of the companies mentioned in this report. The value of securities mentioned in this report can fall as well as rise and are subject to large and sudden swings. In addition it may be difficult or not possible to buy, sell or obtain accurate information about the value of securities mentioned in this report. Past performance is not necessarily a guide to future performance. Forward-looking information or statements in this report contain information that is based on assumptions, estimates of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations. To the maximum extent permitted by law, NZX, Edison, either of their affiliates and contractors, and their respective directors, officers and employees will not be liable for any loss or damage arising as a result of reliance being placed on any of the information contained in this report and do not guarantee the returns on investments in the products discussed in this publication.

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

245 Park Avenue, 39th Floor

10167, New York

US

Sydney +61 (0)2 8249 8342

Level 12, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

245 Park Avenue, 39th Floor

10167, New York

US

Sydney +61 (0)2 8249 8342

Level 12, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

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