Oceania Natural — Update 31 March 2016

Oceania Natural — Update 31 March 2016

Oceania Natural

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Oceania Natural

Revision of key operating milestones

Consumer goods

NZX Company Spotlight

27 January 2017

Price

NZ$2.16

Market cap

NZ$57m

Share price graph

Share details

Code

ONL

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Listing

NXT

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Shares in issue

26.2m

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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.

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Huge market potential in China.

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Board has strong experience in consumer products companies.

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Bear

Price competition.

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Regulatory constraints in China.

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Small player competing with large incumbents.

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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. 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).

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

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

Source: Oceania Natural

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.

Peer comparison

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.

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10167, New York

US

Sydney +61 (0)2 9258 1161

Level 25, Aurora Place

88 Phillip St, 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 9258 1161

Level 25, Aurora Place

88 Phillip St, Sydney

NSW 2000, Australia

Edison, the investment intelligence firm, is the future of investor interaction with corporates. Our team of over 100 analysts and investment professionals work with leading companies, fund managers and investment banks worldwide to support their capital markets activity. We provide services to more than 400 retained corporate and investor clients from our offices in London, New York, Frankfurt and Sydney. 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 9258 1161

Level 25, Aurora Place

88 Phillip St, 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 9258 1161

Level 25, Aurora Place

88 Phillip St, Sydney

NSW 2000, Australia

BrainJuicer Group — Update 31 March 2016

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