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 published its Preliminary Report for the six months to September 2016 reflecting moves to build its presence in China and other regions.
Focus on sales development rather than volume
ONL is focusing on developing direct sales channels rather than chasing short-term volume sales through indirect channels. As a result, it reported a first half year-on-year revenue decline of 24% to NZ$1.06m. The direct channels being developed are through its joint venture Oceania Natural Asia and its subsidiary ONL Wuxi. Both these developments respond to new Chinese regulations that favour businesses building a physical presence in China.
Margin effect from discounting and counterfeiting
Gross margins declined to 34.5%, from 42.8% in the corresponding period a year ago. Management has noted competitive discounting for extended periods. This could be due to attempts to reduce stock levels, market price corrections, or a rise in counterfeit products. The company is taking action to affirm the authenticity of its products, by developing mobile scanning authentication technology and by contracting to produce labels that will respond to that technology.
Outlook: Reasons to expect stronger second half
The second half is traditionally the busiest sales period, and ONL plans to launch a new product range. Management is also evaluating new markets such as Japan, Taiwan, Singapore and South Korea. The company has responded to the new Chinese regulation, putting in place the physical channels favoured by the new regulatory regime. As a result, ONL is well positioned to optimise opportunities. Management continues to monitor discount pricing and, if this continues, revenue and gross margin targets may come under pressure.
Valuation: Current share price implies 18.7x EV/sales
Since listing on the NXT on 31 March 2016, ONL’s shares have quadrupled in value. The current share price of NZ$2.45 implies an EV/sales multiple of 18.7x FY16 sales and 11.7x FY17e target sales. This is well ahead of the 2.0x average of its well-established listed peers (see Exhibit 2).
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 |
|
H1 results and key operating milestones (KOMs)
Exhibit 1: Actual results and key operating milestones
NZ$000s |
Q117 actual |
Q217 actual |
H117 actual |
FY17 target |
Total revenue |
51 |
1,007 |
1,058 |
5,380 |
Direct sales |
25 |
880 |
905 |
1,380 |
Distributor sales |
26 |
127 |
153 |
4,000 |
Gross margin (%) |
56.0 |
33.4 |
34.5 |
40 |
Results for the first half indicate that ONL has a significant task to reach the key operating milestone targets for the year. However, the second half is traditionally the busiest sales period. In addition, the company is exploring new markets such as Japan, Taiwan and Singapore where trial shipments took place during the first half. In Q3 management will evaluate the results of those trials and do the same for South Korea, where a trial is also nearing completion. Management is confident that once the products have been made available for sale in these markets, demand will build. Also, a new product range is to be launched in the second half.
The company has responded to the new Chinese regulation, putting in place the physical channels favoured by the new regulation. As a result, ONL is well positioned to optimise opportunities from new sales structures. Management continues to monitor discount pricing in the third quarter but, if this continues, revenue and gross margin targets may come under pressure. For the time being, management has not revised its key operating milestones.
ONL’s listed peers are predominantly Australian and New Zealand honey and health products companies. All are well-established companies in more mature stages of their lifecycles.
As a consequence, the average EV/sales multiple of this group of 2.0x (Exhibit 2) is well below the EV/sales multiple implied by ONL’s current market capitalisation. With a market capitalisation of NZ$64.2m and net cash of NZ$1.4m at 30 September 2016, the EV/sales multiple on ONL’s actual sales for FY16 is 18.7x, while the EV/sales multiple implied by ONL’s FY17e KOM revenue target is 11.7x.
Exhibit 2: Peer comparison based on 12-month forward consensus
Company |
Country |
Currency |
Price |
Market cap
(m) |
P/E
(x) |
EV/sales
(x) |
EV/EBITDA
(x) |
EBITDA margin (%) |
Operating margin (%) |
Blackmores |
Australia |
A$ |
118.51 |
2,041 |
25.7 |
3 |
16.6 |
18.1 |
20.5 |
Capilano Honey |
Australia |
A$ |
17.64 |
167 |
14.7 |
1.2 |
9.1 |
13.3 |
11.3 |
Comvita |
New Zealand |
NZ$ |
9.25 |
390 |
19.7 |
2.2 |
12.3 |
18.1 |
12.3 |
Vitaco Holdings |
Australia |
A$ |
2.19 |
305 |
21.3 |
1.5 |
12.6 |
11.6 |
9.9 |
Average |
|
|
|
726 |
20.4 |
2.0 |
12.7 |
15.3 |
13.5 |
Source: Bloomberg. Note: Prices as at 29 November 2016.
