Oceania Natural Ltd — Preliminary results and delisting proposal

In the year to March 2018, ONL made a net loss of NZ$2.53m against NZ$1.04 in the prior year:

The company has already commented on its strategic journey to become a food and beverage company with values of quality products and ethical sourcing, with a focus on water and Noni juice. While this transition from its original identity as a trader in Manuka honey remains in progress, revenue has fallen back, at only c 60% the level of FY17. Although gross profit at NZ$0.75 was actually marginally higher than in FY17 on a different product mix, operating expenses and overheads were significantly higher than in FY17 as a result of initiatives to develop its new markets. It was these cost increases that primarily drove the NZ$1.5m increase in the net loss for the year.

In FY18, ONL’s China-based subsidiary, Oceania Natural Wuxi, continued to sell into new sales channels and to new distribution partners. As a result, management believes it has improved its understanding of the relative demand for different products, as well as the geographical split of demand, which should enable it to target sales more appropriately in the coming year. In addition, there should be opportunities for additional product sales around traditional festivals such as Christmas, Gregorian New Year, Chinese New Year and Valentine’s Day.

In FY18, ONL’s Noni juice was shipped to Japan, Korea and Singapore. Management reports that these markets are growing, while still remaining small, but regards these regions as key markets for the future.

At March 2018, the company had net debt of NZ$2.77m, compared with NZ$0.45m at March 2017.

In December 2017, ONL acquired from Aquity International and its subsidiary company, Kauri Springs Aqua, business assets comprising their water bottling, sales and distribution operation located at Kaiwaka, which trades in New Zealand under the ‘Water for Everyone’ brand. The purchase consideration was a maximum $740,000 plus stock, subject to downward-only adjustment based on performance in the period to March 2019.

The company stated that the acquisition would allow ONL to:

ONL is currently finalising the purchase price and has commented that any gain or loss resulting from the increase or decrease in the carrying values of the assets acquired may have a material effect on these results, which has not yet been included in these preliminary results. The assets purchased have been shown at original cost on settlement and have not been revalued in these results. The company has also now announced that it is seeking additional capital to invest in the Kaiwaka plant.

ONL reset its KOM targets in January 2018 to reflect the changing composition and structure of its business. Results for FY18 indicate that ONL overachieved its overall sales target by 10%, based on New Zealand sales that were 23% higher than the KOM target, even though the smaller overseas sales category were 22% lower than the KOM target.

ONL has not reported against its two new KOMs for water sales as a percentage of total revenue, and the total litres of water packed. Management has stated elsewhere that, as a result of the need for further investment in the water plant, revenue and profits have not yet reached expectations.

ONL has been granted a waiver of its obligation under NXT market regulations to set new annual KOM targets. The company does not consider that it has sufficient certainty to set targets, given that it is currently seeking new capital. It will also be clear to investors that in the likely event delisting goes ahead, ONL will no longer be subject to NXT market rules.

The company has initiated a process to cancel its NXT market listing and to continue as a private New Zealand company. The intended process will be a special shareholder meeting in late June where a vote will be held on cancellation. Subject to the vote being carried, the listing will be cancelled shortly thereafter. Given the voting majority of board members, the proposals are likely to be carried, in our view.

We summarise management’s reasons behind the delisting proposal as follows:

When ONL listed in 2016, its main business was the sale of manuka honey, mainly into the Chinese market. The company intended to build on this profitable base to diversify into other retail products and to build a distribution network in China. In fact, pricing for manuka honey dropped sharply in China amid a scenario of aggressive discounting. While the market has recovered somewhat, margins are still significantly less than they were two years ago.

As a result, ONL decided to accelerate product diversification by moving into water products, leading to the purchase in 2017 of the Kauri Springs water plant. That purchase was partly debt financed with NZ$1.15m of this loan falling due August 2018, which will need to be refinanced (the existing lender has reportedly verbally indicated willingness to renew the loan). In addition, the water plant requires investment to improve its efficiency and lower costs, before it can deliver expected levels of profitability. Management does not quantify the scale of investment required.

At March 2018, the company had net debt of NZ$2.77m, made up of loans and borrowings totalling NZ$2.95m and cash of NZ$0.18m.

Management sets out its upcoming financial obligations as follows:

ONL is in discussions with potential investors for capital investment in ONL. The company advises that no terms or pricing have been agreed, but we would highlight management’s advice that any agreed pricing will likely be substantially lower than the recent market price of $1.42 per share.

Considerations behind the plan are as follows:

We consider the share price in relation both to industry peers, and in the light of current developments.

As in the past, we compare ONL’s share price with listed peers. These 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 2.3x (Exhibit 3) is well below the EV/sales multiple implied by ONL’s current market capitalisation.

With a market capitalisation of NZ$37m and net debt of NZ$2.8m at 31 March 2018, the EV/sales multiple on ONL’s actual sales for FY18 is 26.8x, which is more than 10 times as much as the peer average. We suggest that this high multiple reflects the fact that, while the company is in the process of developing new markets, its current sales do not reflect the value implied by the current share price in the same way as more established peers. Conversely, if the shares were valued in line with existing sales and on the same basis as peers, their value would be much lower.

We note that the company has stated its intention to delist from the NXT market in the near future. In addition, as stated above, it is relevant that management is indicating that the any pricing agreed with new investors will likely be substantially lower than the current market price of $1.42 per share. Management explains that it wishes to make any investment in ONL compelling to new investors. As a result, we would suggest that: