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. Following a review of internal forecasts, the company has restated key operating milestones (KOMs) for the year to March 2017, reflecting the fact that it has not been possible to accept pricing expectations of distributors for manuka honey products for Q4. A fuller discussion of trading conditions will form part of the Business Update, due by 31 January 2017.
Cut in distributor sales target
As we noted in our December 2016 Spotlight report, ONL has experienced competitive discounting for manuka honey products for extended periods in its Chinese markets. Trading conditions are to be discussed in the upcoming Business Update, due by 31 January 2017. However, at present ONL reports it has not been able to reach agreement on selling prices with Chinese distributors for Q4, and as a result it has removed such sales from its FY17 targets. This has had a significant effect on the KOM for distributor sales, reducing it from NZ$4.0m to NZ$0.6m.
Step up in direct sales target
The reduction in business through distributors has had a smaller positive effect on direct sales. In addition, there have been increased sales through the newly established subsidiary Oceania Natural (Wuxi). As of September 2016, when it commenced trading, this gives the group a new physical presence in Wuxi City, selling directly into the China market. As a result of both factors, the KOM for direct sales is being increased from NZ$1.4m to NZ$1.6m.
Working with distributors, gross margins remain firm
The net effect of the changes to revenue KOMs is to reduce total revenue targets for FY17 from NZ$5.4m to NZ$2.2m. However, despite the interruption in manuka honey business with distributors in China, the company continues to work with them on other product. In addition, ONL anticipates maintaining its gross margin at the existing KOM level of 40% for the rest of the year.
Valuation: Share price implies 25.1x 2017e EV/sales
Since listing on the NXT on 31 March 2016, ONL’s share price has trebled, although it is down 20% from the October 2016 high. The current price implies an EV/sales multiple of 16.5x FY16 sales and 25.1x new 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 |
|
H117 results and key operating milestones (KOMs)
Exhibit 1: Actual results and key operating milestones
NZ$000s |
Q117 actual |
Q217 actual |
H117 actual |
FY17 target |
Previous FY17 target |
Total revenue |
51 |
1,007 |
1,058 |
2,220 |
5,380 |
Direct sales |
25 |
880 |
905 |
1,615 |
1,380 |
Distributor sales |
26 |
127 |
153 |
605 |
4,000 |
Gross margin (%) |
56.0 |
33.4 |
34.5 |
40 |
40 |
Compared with results for the first half, the revised KOMs represent much less of a task for the remainder of the year than was the case under the previous targets, which we noted in our previous report.
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$57m and net cash of NZ$1.4m at 30 September 2016, the EV/sales multiple on ONL’s actual sales for FY16 is 16.5x, while the EV/sales multiple implied by ONL’s revised FY17e KOM revenue target is 25.1x.
Exhibit 2: Peer comparison based on 12-month forward consensus
Company |
Country |
Currency |
Price |
Market cap
(m) |
P/E
(x) |
EV/sales
(x) |
EV/EBITDA
(x) |
EBITDA
margin (%) |
Operating margin (%) |
Blackmores |
Australia |
A$ |
117.44 |
2,023 |
25.5 |
3.0 |
16.5 |
21.2 |
20.6 |
Capilano Honey |
Australia |
A$ |
15.92 |
115 |
13.3 |
1.1 |
8.3 |
13.3 |
11.3 |
Comvita |
New Zealand |
NZ$ |
6.99 |
297 |
28.0 |
2.0 |
14.9 |
13.6 |
9.3 |
Vitaco Holdings |
Australia |
A$ |
2.21 |
307 |
31.6 |
2.0 |
17.7 |
10.0 |
8.4 |
Average |
|
|
|
|
24.6 |
2.0 |
14.3 |
15.3 |
12.4 |
Source: Bloomberg. Note: Prices as at 24 January 2017.
