Case Study: Comvita – Climate action leaders to watch

Volatility in markets has continued to make for challenging times for investors. As an active manager, this gives the investment team at Mint plenty of opportunity to search out some great ideas.

Friday, November 3rd 2023, 10:41AM

by Mint Asset Management

By David Fyfe – Portfolio Manager, Mint New Zealand SRI Equities Fund

Not all investment ideas need to be big blockbusters, as sometimes it’s the smaller names that can provide the most potential upside. By venturing outside the S&P/NZX50, one name that has come to our attention and more recently into our Mint New Zealand SRI Equities Fund is Comvita.

Who are Comvita and what do they do?

Comvita is a New Zealand-founded company established in 1974. They are a global leader in manufacturing, supplying, and selling Manuka honey and related products. Comvita manages close to 20,000 hives [1] so with the Manuka tree only flowering for 2 -6 weeks a year, it’s a delicate business harvesting this unique product.

Manuka honey is at the premium end of the global honey market which was valued at around $9 billion USD in 2022, and is expected to grow to $15 billion USD by 2030 [1]. The largest market for Comvita’s products is China, where they enjoy the #1 market share position in Manuka honey by some margin [1]. In addition, Comvita also continues to grow sales across North America as well as its more established Australasian presence with much of the recent growth via its improved digital platforms (direct-to-consumer) as the business undertakes its transformation programme including updating its core Enterprise resource planning (ERP) system[1].

Comvita also continues to be at the forefront of research in the honey space, including its recent breakthrough in discovering LepteridineTM2, a unique natural compound found only in Manuka honey. They are undertaking clinical trials on the compounds potential digestive and immunity health benefits, which could add another leg to an already interesting story.

Why is Mint an investor in Comvita?

Comvita is a business that has matured and improved its operations over the last few years after some tougher times. While not dwelling on the past, there have been successive periods of poor earnings, excessive debt levels, and an operating model open to volatile outcomes. Having followed this story for some time, our confidence in the business took shape post 2020, when the company put in place a new management team as well as significant board changes. This allowed the company to reflect and reset its strategy and future direction.

Following this, and to the present day, we have seen many of its past issues resolved, including the updating of its harvest model to protect from losses in poor years, non-core business holdings divested, and balance sheet issues dealt with. Management have been very upfront with a well-articulated strategy for the business into 2025 - at a time when many businesses barely provide insight into the next 12 months! The headlines from this strategy include a $50 million NZD EBITDA by 2025 target at a margin of 20% of sales, while also spending 15% of sales on marketing and operating with gross profit over 60% [1].

While there are many pillars to Comvita achieving its strategy, one that has been clear has been its focus on its digital strategy, including updating its core technology platforms and the move to more digital sales than traditional stores. This increase in direct-to-consumer sales has been key to its gross profit margin expansion with the company noting that for every 10% increase in digital share of sales overall, its gross profit margin increases 1% [1]. Comvita has already met this milestone with gross profit already moving over 60% in recent results. For us at Mint, seeing the progress from strategy to financial outcomes has given us to confidence to follow the story more closely as well as invest in a business that is on its pathway to achieve was it has set out to.

Is it all about the numbers?

While Comvita have a dominate position in the Manuka honey market, they also take a leading role with sustainability matters throughout their business. In the New Zealand listed space, there are few companies like Comvita that prioritise ESG as a core value of their process.

Comvita are one of only a few NZX-listed names that are B Corp Certified [1]. This is significant as it shows Comvita have gone through an independent verification of its commitment to high social and environment performance, transparency, and accountability. Further in 2022, Comvita became the first NZX-listed company to amend its shareholder constitution to consider all stakeholders when making investment and strategic decisions [1].

Their Harmony Plan defines their key sustainability initiatives that remain core to how they operate, these include contributing 1% of EBITDA towards community partnerships, and planting native trees for every pot on Manuka honey sold [1]. In addition, they are Kaitiaki (Guardians) for bees, aspiring to save 100 million bees per year by 2030 which in turn supports the biodiversity of local ecosystems.

While many of these sustainability initiatives are the right thing to do, they can also have material financial outcomes. Comvita, as climate action leaders, have been working towards being carbon-neutral in 2025 but more impressively carbon-positive by 2030, as they continue with expanding their native forest plantations, targeting 20,000 hectares from 7,500 currently [1]. This has obvious benefits for the environment through significant carbon sequestration, but it also materially improves (~20%) Comvita’s cost per hive [1]. This increase will be through improved yields from the newer plantations as well as the higher quality of the manuka honey harvested. That feels like a win-win scenario, hence it's not surprising Comvita is in active discussions with external partners to accelerate their forest plantation plans.

What are some of the risks Comvita face in the next 12 months

Agricultural risk is a constant for Comvita. This has been significant in the past with its prior harvest model having seen significant losses in poor years. Since 2020 when the new model (essentially rationalising hive sites) was implemented, the model has been proven to de-risk outcomes (no worse than breakeven) seen last year as they managed a weaker harvest through a devastating cyclone.

From a demand perspective, the weakening consumer spending globally does add pressure to sales for Comvita. We have certainly seen that here in New Zealand, but also weaker consumer spending in China will be a focus given Comvita’s exposure in that market, especially with some large sales events like the Singles Day Holiday coming up soon.

In addition, managing their elevated inventory levels remains a focus but this is expected to normalise over the next few years improving cashflow and debt levels for the business.

Good outcomes and a worthwhile investment

We continue to hold Comvita in the Mint New Zealand SRI Equities Fund for a few key reasons. The first reason is valuation support. We see a business in a structural growth industry with a strong underlying business that continues to gain market share, that in our view is underappreciated by the market. Expanding profit margins from its improved digital platform as well as the lower-risk new harvest model supports its sustainable cashflows. Looking out to 2025, we believe management can execute on its strategy to achieve close to its FY25 target of $50 million NZD EBITDA, which doing so would make it one of the cheapest names in its sector. As I touched on earlier, this is a company that provides both financial and non-financial benefits to all stakeholders hence one we continue to own and support, a little gem outside the S&P/NZX 50 that’s worth a look!

[1] Comvita AGM Report, October 2023

Disclaimer: David Fyfe is a Portfolio Manager in the Investment Team at Mint Asset Management Limited. The above article is intended to provide information and does not purport to give investment advice
Mint Asset Management is the issuer of the Mint Asset Management Funds. Download a copy of the product disclosure statement here.

Mint Asset Management is an independent investment management business based in Auckland, New Zealand. Mint Asset Management is the issuer of the Mint Asset Management Funds. Download a copy of the product disclosure statement at mintasset.co.nz

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