The Vulnerability of Comvita

EDITORIAL

By Bruce Roscoe

If there is truth to the adage that the optimal time to make a securities investment is when there is blood on the streets, the shares of Comvita Ltd should be an attractive proposition. Following confused earnings releases whose summary is "We lost a lot of money", the company is paring staff, has rescinded beekeeper contracts, replaced its chief executive, and embraced short-termism. The share price, which closed at NZD1.15 on 27 September, has collapsed 64.8% from its 52-week high. The shares may allure the type of private equity fund that acquires a company in order only to break it up and sell the constituent parts. For other investors the shares appear as safe as a hut in a hurricane.

Comvita Ltd was subject to a conditional offer to takeover outstanding shares in February, while the bid was later withdrawn, the mānuka honey exporter remains even more susceptible to hostile takeover as share price continues to fall.

Comvita is now vulnerable to a hostile takeover. By applying the cart-before-the-horse accounting principle that recommends write-downs of asset values in response to reduced stockmarket value, Comvita has waved a red flag to the bulls of funds that search out companies for the purpose of asset stripping. Or the colour of the flag is more white and raised high. Although Comvita, along with much of the mānuka industry, will be unsure how to value the thousands of tonnes of its inventory, linking such a subjective valuation to the fickleness of stockmarket fortune serves only to punish already punch-drunk investors.

On 22 February Comvita announced that an offshore party had made a conditional offer for all outstanding shares at a price that represented a "significant premium" to the share price. On that day the shares closed at NZD2.25. The offer price likely was at least 30.0% higher, or around NZD3.00. A breakup valuation doubtless was among the several valuations the suitor, reportedly a European private equity fund, had calculated before bringing Comvita into close range. Although the fund withdrew its offer after interviewing Comvita executives and putting the company's books under a microscope for two months, the share-price collapse has turned Comvita into a new and even larger target.

Comvita Has No Cornerstone Shareholder

Capilano Honey Ltd, Australia's largest manuka honey producer, can be expected to have monitored the acquisition interest that has enveloped Comvita. Capilano performs as a low road to Comvita's high road in manuka product grade and pricing in offshore markets. So clear is the segmentation that a casual observer would suspect “cooperation”. The companies' apparent coziness, though, may have fractured over Comvita's exit from its 50:50 Medibee Apiaries venture with Capilano at a cost of NZD6.9m.

Capilano would gain much by acquiring Comvita, though the repercussions for the New Zealand honey industry would be grave. Any remaining hopes of securing a certification trademark for "manuka honey" would be euthanized. The UMF Honey Association would face the prospect of losing its flagship brand and supplier of some 60% of its levy income. Once delisted from the NZX, Comvita's public disclosure requirements would reduce to nil and detail of its activities become guesswork.

Could Comvita be a target for Australian honey seller Capilano to acquire? If they did, the repercussions for the New Zealand honey industry would be dire.

Comvita has no cornerstone shareholder that could help defend against a hostile takeover. The largest shareholder is an Auckland-resident individual who holds 12.2% of the company. When Cerebos New Zealand Ltd (defunct) offered NZD2.50 per share in a hostile takeover attempt in 2011, Comvita then chairman Neil Craig issued a DON'T SELL plea. Shareholders, believing in the promise of better times, were unseduced by the offer premium and remained loyal. Now that the nationwide honey inventory is understood to exceed 50,000 tonnes or five times' the amount exported in CY2023, coupled with the revelation that Comvita evidently does not understand its balance sheet, a majority of shareholders may view loyalty as unwarranted. 

The Earnings Results That May Live in Infamy

In a second stab, Comvita on 29 September reported a 12.7% decline in June 2024 year revenue to $204.3m, a net loss of NZD77.4m, and a 49.3% increase in net debt to NZD79.7m.

These earnings results may live in infamy. Questions could be set about them for post graduate students of accounting, or in the examination for the qualification of chartered financial analyst. Comvita behaved like a government agency by outsourcing the finalisation of the results. The release of two sets of the results －initial and amended－ suggests the consultants seemingly had become as muddled as had Comvita's upper echelon of executives (among whom 10 draw salaries exceeding NZD320,000) and its accountants.

Question 1 (in 3 Parts):

(Part 1) Why was a profit and loss amount revised up from a loss of NZD59.6m to a profit of NZD4.5m?

(Part 2) Why were two profit and loss amounts and one cost amount revised down－a profit of NZD14.6m to a profit of NZD10.3m; a loss of NZD5.6m to a loss of NZD9.3m; and a cost of NZD15.7m to a cost of NZD7.6m?

(Part 3) Why was a balance sheet amount revised up from NZD59.8m to NZD62.4m? Discuss.