While the economic challenges of operating a mānuka honey business at the ground level of the industry have become stark for beekeepers, multiple risks confront investors who hold stakes in exporters of the product. Share prices in listed New Zealand mānuka honey companies Comvita Ltd and Me Today Ltd have plummeted 61.2% and 85% respectively in the past year. Writer, former securities analyst, and honey trader Bruce Roscoe reviews the 'landmine landscape' of an industry where investors fear to tread.
Note: This report was first prepared for publication in April. Apiarist's Advocate has updated the original report in the sections that have been overtaken by recent events related to the abandoned takeover proposal for Comvita Ltd and decision by Nestle S.A., the Swiss multinational food and drink processor, to divest from Egmont Honey Ltd. A basic glossary of investment terms has been added, some financial terms have been explained within the report, and share prices have been updated to closing prices for 26 July.
By Bruce Roscoe
Two honey companies are listed on the New Zealand Exchange. One, Comvita Ltd, received an unsolicited offer to purchase all its shares earlier this year, which was withdrawn in May. The other, Me Today Ltd, is soliciting offers to acquire what remains of its honey business.
Comvita, the flagship NZ producer and exporter of mānuka honey and related products, has built tangible brand value. Though its global footprint is wide Comvita is a China-centric company in profit dependence, staff placement, and ambition.
As the largest listed play on mānuka honey in any market Comvita is a frequent target of speculative interest. A 2011 hostile takeover offer saw the company reach for the shark repellent. Not this time. Comvita engaged the NZ unit of a top-tier New York investment bank as advisor before the offer was withdrawn. For a few months at least, there was the possibility that, in the 50th anniversary year of its founding, Comvita would change hands.
Nor does this analysis conclude that Me Today can soon locate a buyer for King Honey Ltd, which it has all but dismantled since agreeing a NZD36m valuation in June 2021.
Me Today has closed four of five King Honey facilities, cut beehive numbers 90.1% to 1,700, and in its last full year lost NZD1.52 for every dollar of honey sold. If the company's estimated 480-tonne honey inventory cannot readily be converted to cash, Me Today's yesterdays are likely to outnumber its tomorrows.
Investors tread a landmine landscape in assessing publicly quoted honey companies which fit the profile of neither growth nor cyclical nor value stocks. Neither Comvita nor Me Today has peers that can serve as valuation yardsticks.
Uncaptained "Industry"
Nor do they participate in an "industry" in the sense of companies united in purpose. The honey "industry", rife with factionalism, appears uncaptained and rudderless. As much was conveyed in the document "New Zealand Honey Strategy 2024-2030－Thriving Together" released in February by Apiculture New Zealand (ApiNZ), to instant attack.
(For "honey" read mānuka honey, which in CY2023 at 8,420 tonnes and NZD319.3m – monofloral and multifloral retail pack and bulk total – accounted for 85.5% and 80.7% of NZ total honey exports by volume and value.)
ApiNZ's observations echoed those made 12 years earlier in the Coriolis Research report "Investment opportunities in the New Zealand honey industry". More opportunities exist now than then as producers seek to call time.
In 2016 and 2022 Melita Holdings Ltd (Havelock North) and Perry Group Ltd (Hamilton) consolidated several mānuka brands under collective-type umbrellas, but those examples are atypical. Decades of honey production and marketing expertise underpinned the brands.
Ngāi Tahu Holdings Corporation Ltd purchased a half share of mānuka producer Watson & Son in 2016. When later converted to a full share (less the medical honey component of the business) the investment had cost NZD110.1m.
As though blue-sky blind Ngāi Tahu then chief executive Mike Sang in 2016 told a Ngāi Tahu website writer that the venture with Watson & Son was “...$30 million annual turnover at the moment. When we’re $300 million, it will look different". In the seven years to follow Ngāi Tahu would disclose operating losses of NZD100.5m and net losses of NZD122.1m from the mānuka business.
(Actual losses were greater. Ngāi Tahu did not isolate Watson & Son-venture operating losses in one, and net losses in four, of the seven reporting years.)
”We underestimated the risks and overestimated our ability to manage those risks", Ngāi Tahu admitted in its 2019 annual report. Due diligence had begun in earnest a year after the acquisition, when Ngāi Tahu came to distrust data relating to assets.
The Ngāi Tahu foray contrasted with the acquisition of Mānuka Health New Zealand Ltd by Pacific Equity Partners Pty Ltd, an Australian private equity fund manager. PEP funds bought Mānuka Health NZ in December 2015 for NZD110m and three years later on-sold the company to Guoco Group Ltd, a Hong Kong Stock Exchange-listed company majority-owned by Leong Company (Malaysia) Berhad, for NZD260m, according to Land Information New Zealand records.
Nestlé New Zealand Ltd's NZD375m acquisition of ORA New Zealand Ltd in August 2022 represented a package of three companies that included mānuka producer Egmont Honey Ltd. Later Nestlé New Zealand's owner, Nestle S.A. of Switzerland, emerged as the ultimate 75.1 per cent owner of Egmont Honey for undisclosed value.
Haphazard Regulation
Those landmark cases aside, investors have not been seduced by whatever "investment opportunities" the Coriolis report believed it had identified in 2012. Regulatory, market, and valuation risk keep them at bay.
The honey industry is regulated haphazardly. The Ministry for Primary Industries (MPI) applies different regulations to the home and export markets and regulations for export markets are not applied uniformly. Maximum residual agricultural chemical levels and the ministry's scientific definition of mānuka honey are examples. Confusion results and presents material risk.
MPI interprets the Australia New Zealand Food Standards Code to the disadvantage of NZ producers by disallowing the word "active" on mānuka honey labels, while Australia allows use of the word. "Active" is the term central to consumers' reason to purchase mānuka honey.
Industry failure to agree on a scientific definition for mānuka honey to defeat counterfeiting resulted in MPI imposing two definitions. Arguments continue.
The backdrop to regulatory shortcoming is that MPI officials view mānuka honey largely as a sunshine industry for shady people where, from a public service viewpoint, the risk/reward ledger has no counterweight in the reward column.
Brand Dilution
Market risk is two-fold. Online store discounting of mānuka honey by 50% or more has become commonplace and signals a commoditization that may not reverse. Brand dilution foreshadows the product value loss.
Mānuka producers, packers, and traders are submerged in a sea of "brands". The Unique Mānuka Factor Honey Association (UMFHA), which in licensing draws little distinction between Arataki Honey Ltd and Amway China E-commerce Co., Ltd, has "certified" as many as 200 mānuka "brands".
UMFHA licensee supply to offshore private-label mānuka sellers accounts for several score more "brands". Packers unaffiliated with UMFHA similarly export own-labelled or private-brand-labelled product, or naked jars for who-knows labelling offshore.
No one can count the "brands" fed by the 4,386 tonnes of bulk mānuka honey certified by MPI as "monofloral" that NZ exported in the five years to CY2024. In the oxymoronic (multiple/single) category of "multifloral mānuka" the final product appearance of the 2,448 tonnes sold in bulk over the same period is unknown.
On top of which Australian honey producers, emboldened by their defeat of all NZ attempts to secure a certification trademark for not a mark as such but for the two words "mānuka honey", have a sizeable presence online and in offshore retail. From that beachhead they launch other strongly antibacterial honeys such as jarrah.
It is against this ocean of dilution that we read the Me Today chairman's address to the shareholders' meeting in December 2022, the first such since acquiring King Honey.
"In terms of brands", said the chairman, "we now have three focus brands all of which have their own clear brand identity". The word "brand" occurred in the address no fewer than 62 times.
Me Today endeavours to relay brand value through website images of a former prime minister and an All Black and a story about the breast cancer of the wife of a co-founder. It advertises product certification by the U.S. Food and Drug Administration. Comvita holds FDA certification in the medical device category for mānuka honey wound dressings. No such products are found in the Me Today lineup.
If "brand value" signifies "added value" then in mānuka honey there is none. Bees have perfectly formulated the honey and the more it is processed the less it is worth, although post-harvest through controlled-temperature storage packers can grow the antibacterial strength of the honey.
Brand value rather accrues through product knowledge and the quality control and reliability in packing achieved over decades of dedication and experience.
The name "Comvita" in some China circles has become synonymous with "mānuka". It is a clear single-word brand and Comvita mānuka honey is known by no other name. Perhaps no more than five major NZ honey exporters operate brands of comparable clarity. Beneath which is a second-tier of perhaps no more than eight meaningful and recognizable brands forged by family-owned companies. Many, if not most, of the remaining hundreds of mānuka brands appear as all but dissociative paint splatter.
Which brings us to valuation. Industry disunity, and the absence of publicly quoted peers, retard due diligence.
Advisor reports prepared for Me Today capital raises contain no industry analysis which should accompany company analysis. Instead, they parrot template expressions such as "...the information...is sufficient to enable shareholders to understand all the relevant factors and to make an informed decision..."
The Capilano Comparison
In the case of Comvita, however, we have the revealing example of Australia's Capilano Honey Ltd.
Capilano until November 2018 was quoted on the Australian Securities Exchange. Its delisting followed acquisition by a China-focused investment fund and private equity investor. (Capilano is now a unit of Hive & Wellness Australia Pty Ltd.)
Comvita and Capilano are bees from similar hives. They are each their home country's largest honey producer and boast 50 and 70-year histories. Both owe their expansion to mānuka. Comvita's medical honey business was begun by Capilano. Both companies have been equal partners in the mānuka venture Medibee Apiaries Pty Ltd since 2015.
In the year of its acquisition Capilano recorded sales of AUD138.5m (to June 2018; Comvita NZD178.5m to the same year-end) and net profit of AUD9.8m (Comvita, NZD8.2m). EBITDA (a crude cash flow value where depreciation and amortization are added back to operating profit) margins were also comparable: Capilano's 11.6% vs. Comvita's 11.5%.
Operational result and earnings measures, though, are where Capilano and Comvita diverge. ASX and NZX market valuations treated the pair as sushi and souffle. Capilano traded at a price to sales ratio of 1.07x (meaning total share value or market capitalization approximated total revenue) at the time its takeover offer was announced. Comvita currently trades at a price to sales ratio of 0.37x. Which tells us that NZX does not understand Comvita.
(Honey company earnings are so hostage to weather and fickle foreign markets that the price to earnings ratios applied to growth companies do not assist valuation.)
Similarly on a price to net asset value basis, ASX recognized that Capilano deserved a premium. It traded at 2.2x NAV at the time of the takeover offer. Comvita currently trades at a 64.2% discount to NAV.
If Comvita were acquired today on the same terms as the Capilano transaction only six years ago, the offer price would be NZD4.80 per share (26 July closing price: NZD1.22).
Amid mānuka honey oversupply and retreating Chinese demand, Comvita's suitor likely was bottom fishing. But Comvita is not distressed and an offer even double the current price would unlikely impress its directors. Response to the hostile bid announced 14 October 2011 by the defunct Cerebos New Zealand Ltd (then majority owned ultimately by Japan's Suntory Beverage and Food Ltd) is instructive.
At a time of foundation laying for long-term growth, Comvita rebuffed the Cerebos NZD2.50 per-share offer as "opportunistic", saying it undervalued the company by a "considerable margin". In the target company statement it also disputed its advisor's valuation range of $3.40 to $4.00. Shareholders remained loyal to a company they viewed as woven into the fabric of NZ. (Comvita closed at $2.10 on 13 October 2011, NZD0.88 higher than the 26 July 2024 close).
A Needed Question
Inventory presents a large valuation issue that should prompt investment advisors and auditors to seek knowledgeable industry input before they issue recommendations or approve financial statements.
Honey producers wear a brave face and gag about excess stock. "A truck laden with drums of honey hurtles around the bend", one gag goes. "Is it carting the drums to a secret location to hide them from liquidators? Or rushing them into cool storage to keep a lid on HMF values?" "Could be doing both!" is the off-stage line.
HMF abbreviates hydroxymethylfurfural, a compound formed by the dehydration of sugars. HMF content in honey grows over time and can indicate heat damage. In its quality standard for honey the Food and Agricultural Organization of the United Nations limits HMF to 40 milligrams per kilogram of honey.
To which harvest years did the 500 tonnes of honey Me Today acquired from King Honey belong? Were any of the some 1,300 drums retested in order to confirm the inventory value Me Today's balance sheet records as a current asset?
Neither advisors nor auditors appear to query that value. Yet a honey packer will not always rely on the laboratory report that accompanies a mānuka seller's drum. The packer may commission a confirmatory test for HMF among other compound levels and, depending on the result, renegotiate price.
Investors must ask whether the current asset value is accurate, insofar as the honey component can be converted to cash within 12 months. After all a "current" asset is defined as a cash equivalent. If inaccurate, then working capital requires recalculation which will test the viability of the business.
Yet the hundreds of tonnes of honey Me Today counts as a current asset and the thousands of tonnes of honey the industry in sum is recording as "current" perhaps belongs in a different balance sheet section. For companies that lack sales it is more a long-term liability, a borrowing from bees upon which repayment will fall due.
High mānuka inventory is not necessarily a warning. Volume is needed for blending to meet MPI definitions, produce the grades of mānuka that export markets require, and dilute high HMF content. For investors the key top-line measure becomes the ratio of revenue to current assets.
Those ratios for Comvita and Capilano in the year of Capilano's acquisition were 1.0x and 1.8x, the lower Comvita ratio reflecting higher inventory and by extension almost certainly a more mature mānuka business. For the year to June 2023 the Comvita ratio was constant at 1.1x and that of Me Today 0.4x. Me Today had become a metaphor for the industry: honey export volume / estimated inventory = 0.4x.
Market Reckoning
ApiNZ had issued warning enough that a market reckoning was due. It wrote in March 2021: "...we estimate the total volume of honey stored in NZ to be in excess of 30,000 tonnes..." That should have red-flagged Me Today's planned acquisition of King Honey which was completed later the same year.
The stock of unsold honey equalled 2.4x total export volume for CY2020. (Export volume had nearly doubled to 12,761 tonnes in the 10 years to that peak year.) Expressed as exports/inventory the ratio was 0.4x. The per kilogram FOB price had more than doubled to NZD39.61 from the NZD15.01 recorded in 2010. Where mānuka stood some producers and traders had begun to see Dutch tulip bulbs, believing that all that was harvested could be sold at ever higher prices.
King Honey, a newcomer that had launched only in 2011, held no reservoir of experience from bad years. As markets fell away Me Today was poised to catch a falling chainsaw, below which lay a growing array of mortuary tablets of those who thought that mānuka was easy money.
Me Today claimed King Honey failed to disclose unsold stock held by a Chinese customer. Legal action was mooted, but abandoned due to the complication of the King Honey owner having provided vendor finance. Painting King Honey as the bad guy was disingenuous. Me Today had recorded consecutive operating losses totalling NZD3.7m in the two years before the acquisition.
Reporting as ventures engaged in Chilean iron ore mining and Australian scrap metal exporting (ironically to China; "SCM" in Me Today's forebear's name abbreviates China Scrap Metal), the reverse listing vehicle that accommodates Me Today has recorded net losses in all but one of 15 full or adjusted reporting periods since its conception in December 2009. (The June 2012 year profit resulted from a foreign exchange transaction.) Operating losses were recorded for all reporting periods while funds were found to pay director fees of USD2.3m and NZD2.1m.
Me Today writes of "ring fencing" King Honey as though mānuka were a toxic substance. Although the term refers to reassignment of debt, observers will sense a thick nuance of fear. The advisor to the latest capital raise warned that liquidation was an alternative to subscription to a rights issue that would allow time for the shrunken King Honey to be sold.
Me Today plans more mānuka product launches without operating a honey business. It has learned what offshore honey companies and brand owners －particularly those in the United Kingdom － have long known. Which is that direct investment in a honey producer is not only risk-fraught on multiple fronts, but unnecessary when the raw material can be bought in drums at a small fraction of the cost of retail-ready product.
Even before Ngai Tahu and Me Today retired thousands of beehives, threadbare beekeepers were exiting the gates of properties they would never own. "We all know that the industry has grown rapidly over the past ten years, but not all are feeling those gains", ApiNZ chief executive officer Karin Kos wrote in April 2022.
Registered beehive numbers have plunged 36.4% to 583,608 as of July 2024, from the 2019 peak of 918,000. There is now a danger of over-correction in an industry that knows no normal.
Capilano shareholders were able to exit at a 34.2% premium to the share price. After the acquisition Capilano would remain in Australian hands. Absent an offer as alluring as made in the Capilano case, the majority of Comvita shareholders can be expected to hold and wait. Their wait may be long.
Comvita's flagship status carries the danger that it will be viewed as a symbol of industry malaise. Moreover, its reliance on China as a pillar of earnings may relegate the stock to a China consumption recovery play.
Capilano recognized that it was unsuited to public ownership. Privatized it could make investments in developing markets without "having our results analyzed every six months", Dr Ben McKee, then managing director, told Fairfax Media.
Comvita appears inherently unsuited to stock exchange listing. In remarks following a call with investors in August 2019 Comvita acknowledged it was "under the shadow of a languishing share price" that undervalued assets. Little has changed.
Investment in Comvita should most reward management, employees, and beekeepers among other suppliers who understand the intricacies and risks of the business. A Fonterra-like structure and specially listed vehicle such as Fonterra Shareholders' Market would assure continued NZ ownership to the benefit of producer-shareholders.
Me Today may not even meet current NZX criteria for listing. Its market capitalization is 57.1% less than the minimum NZD10m that NZX "generally" requires. Moreover, the question whether a reverse listing vehicle should remain quoted on a stock exchange after reporting net losses in 10 consecutive years is unanswered.
*This analysis uses the 26 July 2024 closing share prices of NZD1.22 and NZD0.079 for Comvita Ltd and Me Today Ltd.
Bruce Roscoe is a writer and former director of research for Deutsche Bank Securities Japan. He also consults to honey traders, some of whom from time to time may compete with Comvita Ltd and Me Today Ltd.
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